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Adam Smith’s theory of absolute cost advantage in international trade was evolved as a strong reaction of the restrictive and protectionist mercantilist views on international trade. He upheld in this theory the necessity of free trade as the only sound guarantee for progressive expansion of trade and increased prosperity of nations.
- Adam Smith’s Theory of Absolute Advantage
- Assumptions of The Absolute Advantage Theory
- Achieving An Absolute Advantage
- Advantages of An Advantage
- Absolute Advantage vs. Comparative Advantage
- Criticisms Against Absolute Advantage
- Related Reading
The mercantilist economic theory, which was widely followed between the 16th and the 18thcentury, came under a lot of criticism with the emergence of economists like John Locke and David Hume. Mercantilism advocated a national economic policy designed to maximize the nation’s trade and its gold and money reserves. Mercantilism gained influence due ...
Smith assumed that the costs of the commodities were computed by the relative amounts of labor required in their respective production processes.He assumed that labor was mobile within a country but immobile between countries.He took into consideration a two-country and two-commodity framework for his analysis.He implicitly assumed that any trade between the two countries considered would take place if each of the two countries had an absolutely lower cost in the production of one of the commodities.An absolute advantage is achieved through low-cost production. In other words, it refers to an individual, company, or country that can produce at a lower marginal cost. Such an advantage is established when (compared to competitors): 1. Fewer materials are used to produce a product 2. Cheaper materials (thus a lower cost) are used to produce a pro...
Absolute Cost Advantage
Absolute cost advantage results from the specialization of labor proposed by Smith in his theory. Specialization of labor, or division of labor, results in a significantly higher productivity per unit of labor, and in turn, a lower cost of production. Smith also used the concept of “Economies of Scale” to explain the lowering of production costs, as a higher output due to labor diversification would significantly reduce production costs.
Natural Advantage
A country should produce those goods that are naturally favoring its climatic environment. The type of goods produced would also depend on the availability of natural resources. The presence of lots of natural resources would significantly provide an advantage to such a country while producing the goods.
Acquired Advantage
Acquired advantage includes advantages in technology and level of skill development.
Absolute and comparative advantage are commonly misunderstood concepts. An absolute advantage looks at the financial costs of production, while a comparative advantage looks at the opportunity cost of production. The two terms are contrasted below:
The Absolute Advantage Theory assumed that only bilateral trade could take place between nations and only in two commodities that are to be exchanged. Such an assumption was significantly challenged when the trade, as well as the needs of nations, started increasing. Thus, the theory did not take into account the multilateral trade that could take ...
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May 11, 2023 · The Theory of Absolute Advantage is one of the earliest economic theories that explains the benefits of specialisation and international trade between countries. It was proposed by Adam Smith, the father of modern economics, in 1776 in his seminal work, "The Wealth of Nations."
Sep 30, 2023 · The concept of absolute advantage was developed by 18th-century economist Adam Smith in his book The Wealth of Nations to show how countries can gain from trade by specializing in...
The Scottish economist Adam Smith first described the principle of absolute advantage in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to have no absolute advantage in anything.
The concept of absolute advantage was first introduced in 1776 in the context of international trade by Adam Smith, a Scottish philosopher considered the father of modern economics.
In his analysis, Adam Smith appears to subscribe to the theory of absolute advantage, a popular theory that supports free trade.
