Adam Smith's Subjective Theory of International Trade

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William D Gerdes


International trade is the exchange of goods and services across national borders. Adam Smith's explanation of this phenomenon appears in his Lectures in Jurisprudence. International exchange is viewed as a generalization of the theory of voluntary exchange. Both parties to an exchange benefit, whether they live in the same country (domestic exchange) or a different one (international exchange). The latter is Adam Smith's subjective theory of international trade. As an explanation of international exchange, this theory fares much better that does the absolute advantage hypothesis. That is not surprising. Absolute advantage was not put forth to explain why international exchange occurs. It is a theory of international trade policy: Smith's attempt to explain what can go wrong when governments erect trade barriers.

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