This document discusses classical trade theories, including supply side theories proposed by Adam Smith and David Ricardo and demand side theory by J.S. Mill. It focuses on Adam Smith's theory of absolute advantage, which argues that countries should specialize in producing goods for which they have a natural advantage and trade for other goods, maximizing total global output. It provides assumptions of the theory and uses an example to illustrate how two countries can both benefit from specializing in and trading the good they have absolute advantage in producing. However, it notes the theory fails to explain trade between advanced and backward countries.

1. Classical Trade Theories
Supply Side Analysis
1. Adam Smith
Theory of Absolute Advantage
2. David Ricardo
Theory of Comparative Advantage
Demand Side Analysis
1. J. S. Mill
Theory of Reciprocal Demand

2. Theory of Absolute Advantage
Adam Smith

3. Free Trade
Division of labour enhanced in International Market
Total Output Maximised
Win-Win situation enhances international Welfare

4. Specialization:
• Specialisation among countries based on Absolute Advantage Principle.
• It is of the Nature of natural Advantage.
Specialization
Partial Specialisation
Majority of production of product having
natural Benefits but production of other
products is also done
Complete Specialisation
No production of other products than having
Natural Benefits

5. Assumptions:
1. 2 X 2 X 1 Model
2. Factors of production are Fully Employed.
3. Constant returns to Scale in production.
4. No Transportation Cost.
5. All Labour Units Are Homogenous.
6. Free Trade: No barrier as tariff or Quota exist.
7. Labour is the only Factor of production.

6.  Production of One unit of Labour
Hence, Absolute advantage for:
Nation A – Food
Nation B- Cloth
Nation A Nation B total
Food 20 unit 10 Unit
= 30 unit
Cloth 6 Unit 8 Unit
=14 unit

7.  Production of One unit of Labour
Nation A Nation B total
Food 20 unit 10 Unit
=40 unit(new)
Cloth 6 Unit 8 Unit
= 16 unit (New)

8. Major Drawback:
If one country is advanced and another is backward , than this situation can not be
explained with this theory.