Short Essay on the Classical Theory of International Trade

The classical theory of international trade is known as the Theory of Comparative Costs. Broadly speaking, this theory is simply an application of the principle of division of labour to the production of goods by different countries.

The classical theory averred that international trade develops with geographical (country-wise) specialisation in the production of various goods which is reflected through the differences in their comparative costs of production between any two countries.

The seeds of the classical theory of international trade are, however, found in the writings of Adam Smith. He underlined the principle of absolute advantage as the theory of international trade. But, the credit goes to Ricardo in formulating an explicit and precise theory in terms of the “comparative costs doctrine.” With a lapse of time, the doctrine of comparative costs has, however, gone through many improvements and refinements at the hands of eminent economists like J.S. Mill, Cairnes and Bastable.

In modern times, it has been recast by Taussig and Haberler also. Below we shall discuss in brief the classical version of the comparative costs theory as propounded by Adam Smith, Ricardo, and the refinement made by Taussig.