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maximise their specialisation in the production of goods that they are best
suited to produce (McDonald and Burton, 2002). Modern trade theories

imply that firms can increase their cost competitiveness through trade,
enjoying economies of scale when output increases. According to
McDonald and Burton (2002) the two elements, product specialisation and

economies of scale, offer some answers to the basic question of how
opportunities for trade arise.

3.5 Theories of international trade

All international trade theories – whether classical, neoclassical or modern
focus on the principle of comparative cost or comparative advantage as

the underlying cause of price differences (Doole and Lowe, 2008). Modern
theories have moved away from the rigid classical assumptions of

traditional theory and its static framework of ‘perfect competition’.
According to McDonald and Burton (2002) trade theory ignores many of

the obvious and often significant influences on international trade to
concentrate on the basic market conditions of supply and demand. A
theory of international trade asks various questions: why do countries

export and import certain goods? On what terms do countries exchange
goods? What are the gains from international trade? Two paradigms have

dominated explanations of international trade for five centuries:
mercantilism (1500–1750) and free trade. Both paradigms have
profoundly influenced the trade policies of nations (McDonald and Burton,

2002).

3.5.1 The Mercantilism Theory

Free trade between nations is good for the world as a whole, but is by no
means good for all. The theory suggests that a nation’s best interests are

served by encouraging exports and discouraging imports. Mercantilists
state that trade is a ‘zero sum’ game when one player’s gains are another

player’s losses. Therefore nations should accumulate financial wealth,
usually in the form of gold, by encouraging exports and discouraging
imports (Woods, 2001; McDonald and Burton, 2002). European countries

followed this type of trade from about 1500 to the late 1750s, heavily