1 Setting the context
Members of different societies have traded with each other since the beginning of recorded history.1 However, one of the first efforts to articulate a rigorous intellectual basis for the economic benefits of facilitating trade between members of different societies was made by Adam Smith. In The Wealth of Nations, published in 1776, Adam Smith argued that the gains that could be realized from specialization in domestic economic activity could readily be extended to international economic activity.2
The tailor does not attempt to make his own shoes, but buys them off the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor… What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry, employed in a way in which we have some advantage.3
Smith’s Theory of Absolute Advantage essentially stated that countries should export those products which they can produce more efficiently than other countries and import those products which they cannot. For example, if countries with tropical climates can produce bananas or pineapples more cheaply than countries with temperate climates, the latter should purchase these products from the former. Conversely, if countries with industrialized economies can produce hydro-electric plants or communications systems more efficiently than countries that enjoy a cost...
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