Economies of Specialization and Trade

Abstract

The idea that trade fosters growth dates back to Adam Smith. The central role of specialization and division of labour, and their implications for productivity growth was emphasized by Adam Smith (1776). He analysed the gains from specialization through division of labour even if all individuals are ex ante identical. The resulting concept is now referred to as ‘endogenous comparative advantage’. Emphasizing exogenous comparative advantage, David Ricardo (1817) pursued an alternative line of studies of specialization and division of labour. The neoclassical trade theory based on Ricardo’s concept of exogenous comparative advantage explains patterns of specialization and division of labour between countries. It focuses on the models with constant Retums to scale which cannot explain international trade from individuals’ decisions of their level and patterns of specialization.