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Understanding Absolute Advantage Theory

Adam Smith proposed the theory of absolute advantage, which argues that countries should specialize in producing goods they can make relatively more efficiently and trade for goods that other countries can produce at a lower opportunity cost. According to Smith's theory, specialization and free trade between countries benefits all through increased efficiency and access to a greater variety of goods, assuming a simple model with two countries and commodities and no barriers to trade. Smith's ideas on absolute advantage were seminal in establishing classical economic theories of international trade.

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Julrick Cubio Egbus
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29 views8 pages

Understanding Absolute Advantage Theory

Adam Smith proposed the theory of absolute advantage, which argues that countries should specialize in producing goods they can make relatively more efficiently and trade for goods that other countries can produce at a lower opportunity cost. According to Smith's theory, specialization and free trade between countries benefits all through increased efficiency and access to a greater variety of goods, assuming a simple model with two countries and commodities and no barriers to trade. Smith's ideas on absolute advantage were seminal in establishing classical economic theories of international trade.

Uploaded by

Julrick Cubio Egbus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Absolute Advantage

Adam Smith

Adam Smith
June 5 1723-July 17,
1790
The
theory
of
Sentiments
and
An
Inquiry into the Nature
and Causes of the
Wealth of Nations
(1776)

WEALTH OF NATIONS

Absolute Advantage

Absolute Advantage

Assumptions

2 x 2 x 1 Model
Free Trade
Efficiency
Specialized

TERMS:
Trade exchange one thing for
another
Specialization refers to a countrys
decision to major in the production of
a certain good
Opportunity Cost refers to what you
sacrifice in making an economic
choice.

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