ABSTRACT
The classical theory shows that the equilibrium terms of trade is determined by international supply and demand relations and that they provides the basis for the division of the gains from trade among the participating nations. Gottfried Haberler succeeded in developing his theory of opportunity costs, which actually frees the classical theory from the restrictive assumption of the labor theory of value. The classical economists adopted the simplifying assumption of the labor theory of value. In particular, since economists interest lies mainly in relative as opposed to absolute prices with regard to the pure theory of trade, according to the labor theory of value, goods are exchanged against one another according to the relative amounts of labor they represent. That the labor theory of value is an oversimplification of reality is well known. The perfect mobility of labor is a necessary condition for the validity of the labor theory of value.
