CHAPTER 2: CLASSICAL COUNTRY-BASED THEORIES nation-states expanded their wealth by using their colonies

OF INTERNATIONAL TRADE around the world in an effort to control more trade and
amass more riches.
INTERNATIONAL TRADE THEORIES - are various theories 5. Mercantilism aimed to encourage production within the
that analyze and explain the patterns and mechanisms of national territories through the concession of monopolistic
international trade, how countries exchange goods and privileges granted to the export producing enterprises,
services, and help countries in deciding what should be granting government subsidies, and giving tax exemptions.
exported done globally and what should be imported, in what The importation of advanced technology (mostly to benefit
quantity, and with whom trade should be. the export industries), acquisition of manufacturing secrets,
and encouraging immigration of skilled workers that will bring
International trade theories were initially country-based and in remittances to the country were done. Nation-states also
were called classical theories. Classical economists were placed lots of importance on the development of merchants
oriented primarily toward growth economics, and their main and naval fleets, which would facilitate exports.
concern was to explain how the "wealth of nations" could 6. In mercantilism, the government strengthens the private
be increased. owners of the factors of production, which are the following:
a. Labor - refers to the work performed by a person for a
monetary consideration. It is the monetary consideration that
TRADE - is the concept of exchanging goods and services forms part of the cost of production.
between two people or entities. b. Natural resources - are those found in nature, including
land, trees, and mines.
INTERNATIONAL TRADE- is the exchange goods and c. Capital goods (capital) - consist of those goods which are
services between people of entities in two different countries. produced by the economic system and are used as inputs in
the production of further goods and services. Capital refers
The main points of the classical theories of international to the money or funds used to purchase the goods used in
trade are the following: the production process.
d. Entrepreneurship - the entrepreneur is the one that
a) Trade is an important stimulator of economic combines the factors in the correct proportion and mobilizes
growth. them.
b) Trade tends to promote greater international and 7. Although mercantilism is one of the oldest trade theories,
it remains part of our modern life. Countries such as Japan,
domestic equality.
China, Singapore, Taiwan, and even Germany still favor
c) Trade helps countries to achieve development. exports and discourage imports through a form of neo-
d) In a world of free. trade,international prices and mercantilism, protectionism through tariffs and import
costs of productions determine how much a barriers and domestic industry protection through subsidies
country should trade in order to maximize its and tax exemptions:
national welfare, 8. Free trade advocates highlight how free trade benefits all
e) In order to promote growth and development, self- members of the global community, while mercantilism's
protectionist policies only benefit select industries at the
reliance based on partial or complete isolation is
expense of both consumers and other companies both within
asserted to be economically inferior to and outside the industry. Free trade is when international
participation in a world of free unlimited trade. trade is free from barriers, such as tariffs, quotas, or other
restrictions, and can flourish on its natural growth. It requires
less government regulatory power.
In the mid-twentieth century, economists shifted from 9. The proponents of the theory were Sir William Petty and
country-based to firm-based or company-based Sir Thomas Mun in England, Jean-Baptiste Colbert, Jean
theories, which were called modern theories.These Bodin, Irish-born Richard Cantillon, and Lord Antoine de
theories are useful and can help with international trade by Montchrétien in France, and Antonio Serra and Giovanni
helping a business determine the right country to expand into Botero in Italy, although they never used the term
and make goods more efficiently than other firms. themselves. It was the Scottish economist Adam Smith, in
his Wealth of Nations (1776), who gave currency to the term.
10. Adam Smith viewed mercantilism as not freely initiated
MERCANTILISM and did not bring benefits to all parties. He refuted the
general notion that the wealth of a nation should be
1. The "Commercial Revolution" brought a revolutionary measured by the country's treasury. Through his book, Adam
change in the economy of Europe: the transition from local Smith illustrated that a freely conducted trade (free trade)
economies to national economies, from feudalism to was much better than the mercantile doctrine as it would
capitalism, and from a rudimentary trade to a globally larger benefit most parties.
international trade. 11. Free trade is a system that allowed for liberalization
2. This commercial revolution gave birth to mercantilism. which would pave the way for a freely initiated trade and
According to the mercantilists, it is the goal of the economy engage the maximum possible number of people bringing
politics to ensure that the state is enriched by increasing the benefits to most parties and lead to further development of
entry of gold and silver and stocking the country with the all participants in the long run.
same through creating the highest possible export/trade 12. Laissez-faire economics is a theory that restricts
surplus because exports bring an inflow of gold, whereas government intervention in the economy. Smith
imports lead to the outflow of gold. This is the reason demonstrated that the free market would translate into an all-
mercantilism was also known as "bullionism." encompassing economic development in a significantly wider
3. Mercantilism believes that the state should actively sense than mercantilism..
intervene in the economy. 13. Smith also developed the concept of specialization
Countries employed a policy of protectionism -protecting the leading to the development of economies of scale, creating
export industries that bring in the gold and silver through efficiency with the ultimate effect of achieving sustainable
customs tariffs, quotas, and the like to curtail imports. growth. For him, the collusive relationship between the
4. The period also marked the rise of new nation-states, government and the business class observed in the
whose rulers were able to amass more gold and wealth for mercantile system was detrimental to the citizenry.
their countries by increasing exports and trade. These
14. Adam Smith described mercantilism as having the capitalism, and from a rudimentary trade to a globally larger
following characteristics: international trade.
a. It was used to enhance the economic power of states 2. According to mercantilism, also known as "bullionism," it is
through building wealth, an important measure of which was the goal of the economy politics to ensure that the state is
precious metals, especially silver and gold. enriched by increasing the entry of gold and silver. Exports
b. It led to massive and rapid unification of control of bring an inflow of gold, whereas imports lead to the outflow
countries under strict economic and political policies, in of gold.
sharp contrast with what was observed under feudalism 3. Countries employed a policy of protectionism; the country
resulting in economic nationalism. tried to protect the export industries that brings in the gold
c.The countries aggressively sought to have a favorable and silver.
balance of trade by selling more than they imported so as to 4. New nation-states practiced colonization where one
have a surplus of precious metals and accumulate it over country takes control of another country or region. These
time. nation-states expanded their wealth by using their colonies
15. Jean-Baptiste Colbert was considered as a more around the world in an effort to control more trade and
profound influence on the development of mercantilism in amass more wealth.
France, where it was known as "Colbertism." Jean-Baptiste's 5. Entrepreneurship - The entrepreneur is the one that
system was very similar in concept and application to combines the factors in the correct proportion and mobilizes
mercantilism described by Adam Smith. He carried out the them.
program of economic reconstruction that helped make 6. Capital goods - These consist of those goods which are
France the dominant power in Europe. produced by the economic system and are used as inputs in
16. Sir William Petty posits that surplus gain or surplus value the production of further goods and services.
leads to expanded reproduction and that expanded 7. Capital - This refers to the money or funds used to
reproduction is conditional on capital accumulation purchase the goods used in the production process
(productive capital expansion). Expanded reproduction is a 8. Natural resources - These are found in nature, including
model in which a capitalist economy smoothly reproduces land, trees, and mines.
itself. The surplus value created by the workers is not merely 9. Labor - This refers to the work performed by a person for
realized but reinvested. a monetary consideration. It is the monetary consideration
17. Philipp Wilhelm von Hornick, in his Austria Over All, If that forms part of the cost of production.
She Only Will of 1684, detailed a nine-point program of what 10. In our modern times, the four factors of production are
he deemed effective national economy, which sums up the land, labor, capital, and entrepreneurship.
tenets of mercantilism comprehensively. 11. Neo-mercantilim, therefore, combines protectionism
18. Sir Thomas Mun was most closely associated with the through tariffs and import barriers and domestic industry
idea of mercantilism in England, where Mercantilism was protection through subsidies and tax exemptions.
called commercial system or mercantile system, because it 12. Free trade is when international trade is free from
emphasized the importance of commerce and free trade. barriers, such tariffs, quotas. regulatory intervention.
This school of thought mainly focused on international trade or other restrictions, and can flourish on its natural growth
and the balance of trade through acquisition of silver and free from government regulatory intervention.
gold. 13. Free trade is a system that allowed for liberalization
19. Antoine de Montchrétien published a book titled A Tract which would pave the way for a freely initiated trade and
on Political Economy in which he laid great emphasis on engage the maximum possible number of people bringing
development of agriculture and described it as the basis of benefits to most parties and lead to further development of
all wealth. He stood for the principle of self-sufficiency and all participants in the long run.
and diamonds, which make a state rich and opulent, but the 14. Laissez-faire economics is a theory that restricts
convenience of the things necessary to life. government intervention in the economy.
20. Richard Cantillon is considered by many to be the first 15. Specialization is a method of production whereby an
economic theorist. entity focuses on the production of a limited number of goods
His only known book, Essai sur la Nature du Commerce en to gain a greater degree of efficiency that would lead to the
General (the Essai), may represent one of the single largest development of economies of scale.
steps forward in the social sciences. 16. Economies of scale occur when increasing output leads
He emphasized the need of importing raw materials and to lower long-run average costs. It means that as firms
exporting finished products to maintain a favorable balance increase in size, they become more efficient.
of trade. 17. Jean-Baptiste Colbert was considered as a more
21. Physiocrats is an eighteenth-century group of French profound influence on the development of mercantilism in
economists who believed that agriculture was the source of France, where it was known as "Colbertism."
all wealth and that agricultural products should be highly 18. Sir William Petty posited that surplus gain is the
priced. Advocating adherence to a supposed natural order of fundamental originator of expanded reproduction, which is
social institutions, they also stressed the necessity of free conditional on capital accumulation.
trade. 19. Philipp Wilhelm von Hornick, in his Austria Over All, If
22. The price-specie-flow mechanism was originally She Only Will of 1684, detailed a nine-point program of what
attributed to Scottish economist David Hume to illustrate how he deemed effective national economy, which sums up the
trade imbalances can self-correct and adjust under the gold tenets of mercantilism comprehensively.
standard. Fluctuations in prices in a country adjusted 20. Sir Thomas Mun wrote a pamphlet, A Discourse of Trade
completely or partially by an inflow or outflow of gold or in England, where mercantilism was called commercial
specie which adjusts the price levels across borders and system or mercantile system.
equalized them bringing balance in international transactions 21. Antoine de Montchrétien published a book titled A Tract
and payments. on Political Economy. in which he laid great emphasis on
23. Giovanni Botero and Antonio Serra of Italy did not development of agriculture and described it as the basis of
directly touch on' mercantilism, but developed theories using all wealth.
the city as a unit of analysis and finding development to be 22. Richard Cantillon is considered by many to be the first
the result of industrialization. economic theorist.
He emphasized the need of importing raw materials and
KEY TAKEAWAYS exporting finished products to maintain a favorable balance
1.The "Commercial Revolution" saw the transition from local of trade.
economies to national economies, from feudalism to
23. Physiocrats is an eighteenth-century group of French
economists who believed that agriculture was the source of
all wealth and that agricultural products should be highly
priced.
24. Giovanni Botero and Antonio Serra of Italy did not
directly touch on mercantilism, but developed theories using
the city as a unit of analysis and finding development to be
the result of industrialization.

HALF NUNG REPORT NI JUSTINE NUMBER 3-5 THEN

SA’KIN 1 AND 2 HAHAHAHHA

LESSON SUMMARY
3. The Heckscher-Ohlin theory or H-O theory is based on a
country's production factors-land, labor, and capital; hence,
the theory is also called the factor proportions theory or the
resources and trade theory. Hecksher and Ohlin determined
that the cost of any factor or resource was a function of
supply and demand.
4. Many elaborations of the model were provided by Paul
Samuelson after the
1930s and thus, sometimes the model is referred to as the
Heckscher-Ohlin-Samuelson (HOS) mode.
In the 1950s and 1960s, some noteworthy extensions to the
model were made by Jaroslav Vanek, and so occasionally
the model is called the Heckscher-Ohlin-Vanek model.

KEY TAKEAWAYS

3. Hecksher and Ohlin determined that the cost of any factor

or resource was a function of supply and demand.
4. Countries with cheap labor would specialize in labor-
intensive industries, while countries that have large pools of
capital would specialize in capital-intensive industries.
5. International trade can improve economic efficiency, but
that trade will also cause a redistribution of income between
different factors of production; some will gain from trade,
some will lose, but the net effects are still likely to be
positive.