Classical Theory Of International Trade

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Historically, economists made the effort to advance several theories that were used in explaining the trend of international trade. The theories provided impute to other readers in understanding how the global trade was involved. Review of the literature concerning Germany-Tanzania trade has not yet been done by a lot of researchers. The study acknowledged that there are other theoretical ideas of economist that presented information regarding the nature and source of international trade between nations. These are the one that will be presented in this part and include classical theory, neoclassical theory, new trade theory and global value chains. This part will be finalised by a conclusion. Given the summary distribution of the theories that…show more content…
The main concern of the classical economists was about a surplus of the economy in regarding to its formation, its distribution among different classes in the economy and its utilization (either luxury or for investment). The classical focus more in favouring investment as the best way for surplus utilization since in the long run it can facilitate expansion in capital formation, hence ‘wealth of a nation’ (Felderer and Homburg 1992: 15). The classical theory begins with the theory of absolute advantage that was advanced by Adam Smith. Smith advocates for a free market in the absence of the government regulations for the perfect competitive to exist in the market so as to promote trade (Smith 1776). Smith uses the idea of division of factor of production i.e. labour to elaborate about the theory of absolute advantage. The theory of absolute advantage states that if there are two countries and two commodities traded, and one country is more efficient in terms of using fewer factors in production of one commodity than the other country, and the other country is more efficient in production of the other commodity then there is a room for a profitable trade between the two countries (ibid: 97). For instance, in a hypothetical world of only two countries involved in trade i.e. A and B and only two goods traded eg. wheat and coffee. If country A could produce wheat by using real cheaper factors than in its production with coffee, then it should specialise in production and export of wheat and traded for coffee with country B and vice versa is true (ibid: 98). For the case of trade between Tanzania and Germany, Tanzania exports raw materials such as coffee, tobacco, and minerals to Germany while Germany exports industrial machines, vehicles and commodity goods. With absolute advantage theory Tanzania needs to specialise and export raw materials in exchange for
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