ade patterns. This established the basis for the latter analyses, especially for the thinking behind the free market paradigm and welfare analysis. Classic theory of international trade based on comparative advantages does not, however, conclude that there will be no losers when tariff and non-tariff barriers are removed and trade increases. The point is that winners will be able to compensate losers and still be better off than in a situation with no trade at all. The problem is that classic trade theory assumes that both winners and losers will be situated within national borders owing to the relative (international) in-mobility of capital. With international mobility of capital, winners and losers will not only be lain in different industries or branches, they will also be situated different countries based on absolute advantages ( Kirkelund, p25).
Adam Simith's model
The Scottish economist, Adam Smith gave the trade theory of absolute advantage in 1776. The primary advantage of trade, he argued, was that it opened up new markets for surplus goods and also provided some commodities from abroad at a lower cost than at home. This was due to the fact that a country has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources. Therefore, contrary to Mercantilism, Smith argued that a country should focus on production of goods in which it holds an absolute advantage. He wrote:
It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.The tailor does not make his own shoes but buys them from the shoemaker... What is prudence in the conduct of every family can scarce be folly in that of a great kingdom.If a foreign country can supply us with a commodity cheaper than we ourselves can make it,better buy it of them with some part of the produce of our own industry,employed in a way in which we have someÂadvantage. [2]
Smith's absolute advantage is determined by a simple comparison of labor productivities across countries. Nations can manufacture more quantities of goods in which they have absolute advantage with the labor time they save through international trade. Essentially, Smith argued that a firm supplying a larger market would be able to exploit more efficiencies from specialization than could a firm supplying a smaller market [3] . An implication of this is that larger scale producers can generally get lower per unit costs than a smaller scale producer, and larger domestic economies can get greater relative productivity [4] . The intuition translates directly to the case of international trade. Expanding the market through trade, in principle, should allow domestic firms to achieve greater specialization-induced economies of scale. This insight went with the observation that many similarly situated countries (with similar factor and technology endowments) in fact participate in trade, which often occurs across the same industry in two different countries, led a number of economists to consider how economies of scale bring countries to trade. In these models, countries specialize, not following any particular comparative advantage, but rather to achieve the efficiency gains of large scale production [5] . The upshot of these models from a welfare perspective, in the aggregate, is similar to that of the comparative advantage models. All countries will gain from trade in the presence of scale economies since worldwide production will increase as trade creates larger markets. No country would then need to produce
