Scribd Logo
Upload

Welcome to Scribd!

  • Absolute Advantage - Principles of Economics

    Uploaded by

    Shaonlee Patranabis
    27 views14 pages
    Adam Smith introduced the concept of absolute advantage, where a country should specialize in producing goods that require fewer resources. The document provides an example comparing India and Germany. India requires fewer labor hours to produce tea (200 hours) than engines (50 hours), so it has an absolute advantage in tea. Germany requires fewer hours to produce engines (300 hours) than tea (10 hours), so it has an absolute advantage in engines. If each country specializes according to its absolute advantage, total world production increases from 315 units of engines and 70 kg of tea to 800 units of engines and 700 kg of tea. Specializing allows both countries to consume more by trading goods according to their lower opportunity costs.

    Original Description:

    A simple presentation on the principle of absolute advantage as proposed by Adam Smith, using an example.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Adam Smith introduced the concept of absolute advantage, where a country should specialize in producing goods that require fewer resources. The document provides an example comparing India and Germany. India requires fewer labor hours to produce tea (200 hours) than engines (50 hours), so it has an absolute advantage in tea. Germany requires fewer hours to produce engines (300 hours) than tea (10 hours), so it has an absolute advantage in engines. If each country specializes according to its absolute advantage, total world production increases from 315 units of engines and 70 kg of tea to 800 units of engines and 700 kg of tea. Specializing allows both countries to consume more by trading goods according to their lower opportunity costs.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    27 views14 pages

    Absolute Advantage - Principles of Economics

    Uploaded by

    Shaonlee Patranabis
    Adam Smith introduced the concept of absolute advantage, where a country should specialize in producing goods that require fewer resources. The document provides an example comparing India and Germany. India requires fewer labor hours to produce tea (200 hours) than engines (50 hours), so it has an absolute advantage in tea. Germany requires fewer hours to produce engines (300 hours) than tea (10 hours), so it has an absolute advantage in engines. If each country specializes according to its absolute advantage, total world production increases from 315 units of engines and 70 kg of tea to 800 units of engines and 700 kg of tea. Specializing allows both countries to consume more by trading goods according to their lower opportunity costs.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 14

    Absolute Advantage (Adam Smith, The Wealth of Nations, 1776) An Example

    Shaonlee Patranabis Economics, Group- 1/C

    Adam Smith
    Scottish, (1723-1790)

    Moral philosopher
    Pioneer of political economy Free thinker Promoted free trade

    Absolute Advantage

    Lower Costs
    Same Output

    Same Input

    Smiths Arguments
    Against mercantilism

    Allocation of resources Application of opportunity costs and theory of specialization to nations

    Technological differences.

    Assumptions of the Model


    Two countries, two commodities Efficiency objective Zero transportation costs

    Resources are absolutely mobile within a country


    Resources are absolutely immobile between countries. Full employment

    An Example

    Assuming two countries


    1.India 2.Germany

    Commodities

    Assuming two commodities:


    Engines Tea

    Consumption of Labour Hours


    Commodity Labour hours consumed in producing 1 unit of 1 kg of Tea Engine India 200 50 Germany 10 300

    Assuming,
    Total labour available for each country = 6000 hrs Labour devoted to each commodity = 3000 hrs

    Production Schedule of both Countries

    Germany
    Engine Tea (units) (kg) 300 10
    Engines Tea

    India
    Engine Tea (units) (kg) 15 60
    315 units 70 kg

    World Production

    Production Possibility Frontier


    G e r m a ny
    (0,600)

    India
    Engines(units)

    Engines(units)

    (10,300)

    (0,30)

    (60,15)

    (120,0) Te a ( k g ) Te a ( k g )

    (120,0)

    Enlightened by Adam Smith,


    Germany
    (0,600)

    India
    Engines(units)

    Engines(units)

    (10,300)

    (0,30)

    (60,15)

    (120,0)

    (120,0) Te a ( k g ) Te a ( k g )

    So, Total Production of the World,


    800

    700
    600 500 400 300 200 100 0

    Tea
    Engines

    Before

    After

    An Experiment
    This example is arbitrary in that the division of the labour resource into halves was arbitrary. It is possible to show, using linear programming that if Germany allocates s% of its labour to engines and (1-s)% to tea ; India c% to tea and (1-c)%, then total world production is maximized at s = 1 and c = 1, i.e., at the Absolute Advantage solution.

    You might also like