Abstract
The basic concept underlying all international transactions is that foreign markets are extensions of domestic markets, in the sense that goods and services produced domestically, and whose quality is reflected in the strengths of the supply and demand curves, can also be sold internationally. This market-extension concept allows for the developing of markets in different countries, regardless of the domestic market conditions. Traditionally, the significance for foreign trade is that it provides an outlet for a country's goods and services, so that employment is maintained and profits continue to increase. For this reason, classical and neoclassical economists emphasized the comparative advantage of trade, and the basis for establishing trade among partners whose advantage in production of different goods and services warranted the international exchanges. The key theorists who have introduced the notion of international trade were Adam Smith and David Ricardo. The foundations of their theories and major difference of viewpoints are the subject of this paper. Ricardo's view on international trade was based on the concept of comparative advantage. This principle is an advance on that of absolute advantage in the sense that a country suffering absolute disadvantage in the production of every commodity could still gain from trade.
