Question

What is the main difference between Adam Smith and Ricardo with regard to the emergence of foreign trade?

Answer 1

Adam Smith Foreign Trade:

1. According to Adam Smith, the basis of International trade was absolute cost advantage.
2. Trade between two countries would be mutually beneficial when one country produces a commodity at an absolute cost advantage.
3. Adam Smith argued that all nations can be benefitted when there are free trade and specialisation interms of their absolute cost advantage.

Ricardo Foreign Trade:

1. Ricardo demonstrates that the basis of trade is the comparative cost difference.
2. Trade can take place even if the absolute cost difference is absent but there is the comparative cost difference.
3. According to Ricardo, a country can gain from trade when it produces at relatively lower costs.