- the physiocratic model

- the absolute advantage theory

- the theory of comparative advantage

Physiocratic model

The mercantile policies imposed in the 16th - 17th century, which proclaimed the accumulation of wealth through trade, in the form of money capital, had ridden the most of European countries (maybe except Germany and, in some measure, Britain) into a state of a downfall of production, especially of agricultural one.

Gradually there appeares the idea that the wealth consists of goods. In this sense, physiocrats can be considered the pioneers. Supporting that the wealth is the totality of agricultural goods, physiocrats leave money the role of a means of exchange only.

In these conditions, the new conception about the international trade appears. Once the wealth derives from agriculture, it is not created by trade, therefore the trade must be based only on the exchange of equivalents, while money are no more than a means of exchange.

The physiocrats oppose to the active ("favourable") balance, as it results from the export of wealth (in the form of goods), and the import of money (which are not wealth). They fight to realise an equilibrated balance in international trade.

Quesnay

The founder of the Physiocratic School, Quesnay, in all probability heavily indebted to Cantillon, brought out the fact that the state of the balance of trade between nations is neither an indicator of the advantages of foreign commerce nor that of the wealth of nations. But he was the author of theory which contained the idea that when a country imports luxury goods, selling the most necessary or most useful commodities, it prospers, because it means that the people are able to produce beyond its basic requirements.

The Absolute Advantage Theory

The British school of "classical economics" began in no small measure as a reaction against the inconsistencies of mercantilist thought. Adam Smith was the 18th-century founder of this school; his famous work, "The Wealth of Nations", is in part an anti-mercantilist tract. In "The Wealth of Nations", Smith emphasized the importance of specialization: in a world where the productive resources are scarce and human wants cannot be completely satisfied, each nation should specialize in the production of goods it is particularly well equipped to produce; it should export part of this production, taking in exchange other goods that it cannot so easily turn out.

Adam Smith

Adam Smith's attack was probably the boldest one on the "mercantile system" which was already tottering both because economic changes had given some of these doctrines an antiquarian flavor and because the piecemeal invalidations of these doctrines by the many forerunners of economic liberalism hardly left it a "leg to stand on". All the same, without Smith's vigurous, forceful, and systematic statement of its weaknesses, it might have lingered much longer than it did.

On the other hand, Smith was unfortunately not capable of precisely formulating a general theory of international trade. Apart from his building up an imposing structure of arguments in favor of freedom from restrictions on foreign trade activities, his contributions to this theory are relatively minor, as Smith considered mistaken that a producer needs an absolute advantage to export its products.

The basic concepts of Smith's teory of international trade may be considered the following:

1. The international commerce is close related with the social division of labor.

2. The international trade after Smith is based apon the freedom of action and the incentives of economic agents.

3. In international trade the competition is free and perfect (without monopolies and any governmental restrictions in the form of protectionist policies).

From these concepts the following indications on international economic relations result:

1. In the result of labor division it is not necessary and even possible that every country produce inside all the products it needs. It is because different states are provided with the factors of production of different types and quality in different proportions. As the result every country must specialize in production of that goods, for which the costs of production are the lowest.

2. Every country imports the goods for which it pays a lower price than it would cost him in case it produced this product domestically.

3. The difference between the domestic cost of production and the import price is the absolute advantage obtained through the international trade, this rule being general for all countries.

4. At the domestic range the state must not interfere in economy, as it always disturbs economic agents from seeking the most efficient mode to invest factors of production it posesses.

5. In the international trade must be promoted the policy of free competition (without monopolies) and a policy of free exchange (non-discriminating).

Much as Smith was aware of the benifits of free trade and was able to influence the British economic thought, he was not an unqualified free trader. He singled out two primary cases which in his view justified the imposition of barriers on imports for the purpose of encouraging domestic industry.

First, some particular industries may be necessary for the defense of a country. From this point of view, the British Navigation Acts, inasmuch as they promoted the building up of a merchant marine to be used in peace and war alike, were perfectly sensible.

The second case is an application of the principle that normally competitive conditions should not be distorted by government intervention. Consequently, it will be proper to place a burden on foreign industry if this merely neutralizes the disadvantage under which domestic industry operates because it is burned with some taxes from which the foreign producers are exempt. After the imposition of a "matching" tariff duty, a form of equalizing adjustment no larger portion of domestic labor and capital would be devoted to the particular domestic industry of a country than what would naturally go to it. "It would only hinder any part of what would naturally go to it from being turned away by the tax, into a less natural direction..." Smith does not underrate the difficulty arising from the fact that imported commodities are seldom perfect equivalents of the domestic produced variety.

Adam Smith took up two secondary cases in which he held it to be a "matter of deliberation" whether or not to follow a laissez-faire policy.