TRADITIONAL THEORIES OF INTERNATIONAL ~ TRADE MERCANTILISM > Itis the oldest theory > This theory is given by Thomas Mun » Itis based on ZERO SUM GAME > Emerged in England in the mid 16" century > It assumes GOLD as a measure of country's wealth > Primary goal is to increase the wealth of the nation by acquiring gold,TRADITIONAL THEORIES OF INTERNATIONAL TRADE MERCANTILISM > Country should increase gold by promoting exports and discouraging imports (surplus in BOT). > Drawback: This theory did not recognize anything except gold as a measure of country's wealth.TRADITIONAL THEORIES OF INTERNATIONAL TRADE David Hume's Price Specie Flow Mechanism Acountry cannot benefit in long run by only exporting or importing. After some time, there will be disequilibrium in Balance of Trade. David Hume showed that due increase in inflow of gold ina country, there will be increase in money supply leading to increase in prices which would discourage exports and encourage imports.TRADITIONAL THEORIES OF INTERNATIONAL TRADE ABSOLUTE ADVANTAGE > Based on productivity and efficiency. > Trade is POSITIVE SUM GAME. » Given by Adam Smith in1776. > Absolute advantage is when a country can produce a product more efficiently than other country.TRADITIONAL THEORIES OF INTERNATIONAL TRADE ABSOLUTE ADVANTAGE » Export goods of Production Advantage and Import goods of Production Disadvantage——————_ > Sources of Absolute Advantage: a) Natural Advantage b) Acquired Advantage » Disadvantage: No explanation where a nation may have advantage in producing both commoditiesTRADITIONAL THEORIES OF INTERNATIONAL TRADE COMPARATIVE ADVANTAGE > Itis the extension of Absolute Advantage Theory. » Given by David Ricardo in 1817. > Trade is POSITIVE SUM GAME. > Ifa country has advantage in production of both commodities, then compare the efficiency of both goods. > Produce and Export the good which can be produced more efficiently.TRADITIONAL THEORIES OF INTERNATIONAL TRADE Acquired ar ge—TRADITIONAL THEORIES OF INTERNATIONAL TRADE Natural AdvantageTRADITIONAL THEORIES OF INTERNATIONAL TRADE oe Example Truck Car