What is international trade?

International trade is defined as the economic transactions carried out between countries. It represents the exchange of goods and services from one country to another, i.e. imports and exports.

Smith's theory

Smith's theory of international trade is called the theory of absolute advantage. In his book, “An inquiry into the Nature and Causes of the Wealth of Nations”, published in 1776, he argued that to become wealthy, nations should specialize in the production of goods and services in which they have an absolute advantage and engage in free trade with other countries to sell their products.

Ricardo's theory

Ricardo demonstrates the relevance of his theory of comparative advantages using an example. He takes the example of two countries: England with cotton production and Portugal with wine production. He concludes:

  • Higher output
  • Each country has the possibility of being part of the international division of labor without having an absolute advantage in the production of a good

Ricardo militates for the establishment of the free importation of foreign products, because free trade allows both:

  • Increase the quantities produced and traded
  • Pacify relations between countries that trade with each other.

The main benefits of international trade

  • Competition
  • Suppliers work harder to provide the best quality goods of at the lowest price
  • More choices for consumers and cheaper
  • According to economists, the consumer gains more than the domestic producer loses.
  • Economy of scale
  • Production in greater volumes
  • The production cost of each good is lower
  • Comparative advantage
  • Opportunity to specialize for one country
  • Countries should however consider all opportunity costs before focusing on comparative advantage. Indeed, a country has a comparative advantage in the production of a good when its opportunity cost is lower than that of other countries.
  • Transfer of technology
  • Technology and progress in a field are transmitted from one country to another
  • A nation can benefit from the know-how of another
  • Employment
  • Trading nations have much lower unemployment rates than countries that have embraced protectionism