Economic Principles of International Trade

Abstract

International trade theory has come a long way since the days of the classical economists. However, the intuition that can be gained from the great theorists such as Adam Smith and David Ricardo still dominates the thinking of modern economists. In particular, Ricardo demonstrated that free trade was a “first-best” policy solution.¹ This holds true today, even though the formal analysis of international trade theory has changed substantially. In fact, many of the opponents of international trade today (from the “anti-globalists” on the left of the political spectrum to the economic nationalists on its right) present arguments that Ricardo himself was able to dismiss over a hundred years ago. While the names and the subjects have changed, the basic principles have not.

Economists frequently distinguish between “first-best policies,” which unambiguously lead to greater efficiency, and “second-best policies,” which may or may not, as they inevitably involve some sort of tradeoff.