1. Theories of World Economy

2. 1. Mercantilism and concept of Free Trade
2. Classic theories of International Trade
Theory of absolute advantage
Theory of comparative advantage

3. Mercantilism dominated Western European economic policy and discourse from the 16th to late-18th centuries

4. Mercantilism - a system of views of economists XV-XVII centuries, focused on international trade, mostly on stimulating of export operations.
Representatives directions: Thomas Man, Antoine de Montchretien, William Stafford.

5. Mercantilism is the economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country.
In particular, it demands a positive balance of trade.

6. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included:
Building a network of overseas colonies;
Forbidding colonies to trade with other nations;
Monopolizing markets with staple ports;
Banning the export of gold and silver, even for payments;
Forbidding trade to be carried in foreign ships;
Export subsidies;
Promoting manufacturing with research or direct subsidies;
Limiting wages;
Maximizing the use of domestic resources;
Restricting domestic consumption with non-tariff barriers to trade.

7. The key mercantilism ideas
The main wealth of a society - precious metals
A source of wealth is trade
Government should stimulate accumulation of precious metals

8. 2. Classic theories of International Trade Theory of absolute advantage
The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication “An Inquiry into the Nature and Causes of the Wealth of Nations” in which he countered mercantilist ideas.

9. Adam Smith suggested that, for the state can be beneficial not only export operations, but also buy (import) goods on the external market

10. Adam Smith attempted to determine which products beneficial to export, as well as which to import

11. Simplifications of Smith’s theory
In the world there are only two countries
In the countries are only two goods
No Limitations in International Trade
International Trade is balanced
Factors of production are not moved between countries

12. The principle of the absolute advantage
Country А
CountryВ S
3 h
12 h Т
6 h
4 h

13. Benefits from the international division of labor on the basis of the principle of absolute advantage
Country А
Country B
World Economy S +2 -1 +1 T +3

14. Theory of Comparative advantage
Comparative advantage was first described by David Ricardo who explained it in his 1817 book “On the Principles of Political Economy and Taxation” in an example involving England and Portugal

15. In economics, the law of comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.

16. Even if one country is more efficient in the production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.

17. England Portugal Cloth Wine 100 workers / year 90 workers / year