International Trade Theories
An international trade theory can be seen as a measure to address problems in a country with a weak macro economy, high unemployment and inflation. International commitment to a free market economy will bring prosperity to the world economic system. Since 1970, the time of Adam Smith, economists have shown that free trade is efficient and leads to economic welfare.
Mercantilism – This trade theory suggested that a government can improve economic well being of the country by increasing exports and reducing imports, but turned out to be a flaw strategy.
Absolute Advantage – A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. In the case of Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialisation and trade, if Zambia produces copper and exports it to those countries that specialise in the production of other goods or services.
Comparative Advantage – A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to spe ...