Trade Theories developed overtime
First trade theory was developed during the period 1500-1800 by the group of writers called mercantilists who found that with the help of foreign trade, nation can regulate its domestic and international affairs. According to the mercantilists, if a country could achieve a surplus of exports over imports then it will raise the domestic output and employment of the country. But, later on this theory was not successful to hold as a true. This theory is applicable only for a short term economic advantages. In the long run, this theory would automatically eliminate. According to the mercantilists, the world's economy was of constant size which means not all nations could benefit of international trade. That's why this theory was under strong attack and proven false.
The next major trade theories was developed by Adam Smith which is called Principle of absolute advantage. According to smith, international trade is beneficial when one nation has an absolute cost advantage in one good and the other nation has and absolute cost advantage in the other good.
According to smith, International trade allows nations to take advantage of specialization and the division of labor, which increase the general level of productivity within a country and thus increase world output. Smith further said that a nation will import those goods in which it has an absolute cost disadvantage but it will export those goods in which it has an absolute cost advantage. According to Smith, each nation benefits by specializing in the production of the good that it produces at a lower cost than the other nation, while importing the good that it produces at a higher cost. But, Smith's trade theory was under attack because of its validity. Smith's theory requires at least one least-cost good which can be exported...