Scribd
Upload
3K views8 pages

ABSOLUTE ADVANTAGE THEORY Presentation

This document summarizes Adam Smith's absolute advantage theory of international trade. It introduces absolute advantage as the ability of an entity to produce a good using fewer inputs than another entity. The theory was introduced by Adam Smith in 1776 to counter mercantilism. It assumes factors cannot move between countries, there are no trade barriers, and trade must balance. Countries specialize in goods they have an absolute cost advantage in producing and trade benefits both countries through increased production and income. The theory has limitations as it only considers bilateral trade between two countries and two goods.

Uploaded by

Ajmal Roshan
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
3K views8 pages

ABSOLUTE ADVANTAGE THEORY Presentation

This document summarizes Adam Smith's absolute advantage theory of international trade. It introduces absolute advantage as the ability of an entity to produce a good using fewer inputs than another entity. The theory was introduced by Adam Smith in 1776 to counter mercantilism. It assumes factors cannot move between countries, there are no trade barriers, and trade must balance. Countries specialize in goods they have an absolute cost advantage in producing and trade benefits both countries through increased production and income. The theory has limitations as it only considers bilateral trade between two countries and two goods.

Uploaded by

Ajmal Roshan
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 Theory Introduction
  • Definition of Absolute Advantage
  • History of Absolute Advantage Theory
  • Assumptions of Absolute Advantage Theory
  • Advantages of Absolute Advantage Theory
  • Disadvantages of Absolute Advantage Theory
  • Example of Absolute Advantage
  • Conclusion and Acknowledgement

ABSOLUTE

ADVANTAGE THEORY

AJMAL ROSHAN E
P201701
[Link] 2nd Semester
Absolute Advantage
Absolute advantage is the ability of an individual, company, region, or country
to produce a greater quantity of a good or service with the same quantity of
inputs per unit of time, or to produce the same quantity of a good or service per
unit of time using a lesser quantity of inputs, than another entity that produces
the same good or service.

This theory is introduced in 1776 by a Scottish economist, Adam Smith in his


work “An Inquiry into the Nature and Causes of the Wealth of Nations”.
History of Absolute Advantage Theory

• In between the 16th and the 18th century, the mercantilist economic theory was widely used.
• It faced a lot of criticism with the emergence of economists like John Locke and David Hume.
• Mercantilism gained influence due to the emergence of colonial powers.
• Adam Smith and Daniel Ricardo, both staunch critics of the concept, came up with their own
theories to counter mercantilism.
• Smith was the first economist to bring up the concept of absolute advantage.
• In his work “The Wealth of Nations ”, he pointed out some things;
• First, he points out that, through opportunity costs, regulations favoring one industry take away
resources from another industry where they might have been more advantageously employed.
• Secondly, he applies the opportunity cost principle to individuals in a society. Each individual thus
specializes in the production of goods & services in which he/she has some sort of an advantage.
• Thirdly, Smith applies the same principles of opportunity costs and specialization to international
economic policy, and the principle of international trade.
Assumptions
• Lack of mobility for factors of production
Adam Smith assumes that factors of production cannot move between countries
• Trade barriers
There are no barriers to trade for the exchange of goods.
• Trade balance
Smith assumes that exports must be equal to imports. This assumption means that we cannot have
trade imbalances, trade deficits, or surpluses.
• Only two commodities are traded & trade is between two countries
He took into consideration a two-country and two-commodity framework for his analysis.
• The only element of cost of production is labour
Smith assumed that the costs of the commodities were computed by the relative amounts of labor
required in their respective production processes.
• Each countries have a lower cost production commodity
Advantages
• Absolute Cost Advantage
Absolute cost advantage results from the specialization of labor proposed by Smith in his
theory.
• Natural advantage
 The presence of lots of natural resources would significantly provide an advantage to such a
country while producing the goods.
• Increase of International Trade
 The country can export their own specialize goods and services to other countries and import
other goods and services. This will benefit the both countries by increase the producer profit
and country income.
• Increase of foreign investment
The absolute advantages that increase international trade will cause a country foreign
investment to increase. 
• Acquired advantage
Disadvantages
• Only bilateral trade could take place between nations
The Absolute Advantage Theory assumed that only bilateral trade could take
place between nations and only in two commodities that are to be exchanged.
• Free trade exists between nations
The Absolute Advantage Theory assumed that free trade exists between nations. It
did not take into account the protectionist measures that are adopted by countries.
• Absence of absolute advantage
It is possible for a country do not have absolute advantage in anything.
• More factors of production
There are several factors of production were used to produce goods such as
capital, land and different types of labor.
Example
12 guns or
Mexico 6 slabs of bacon

6 guns or
Sweden 12 slabs of bacon

Each country needs a minimum of four guns and four slabs of bacon to survive.

 Mexico can spend 1/3 of the year making guns and 2/3 of the year making bacon.
 Sweden can spend 1/3 of the year making bacon and 2/3 making guns to produce the same.

Mexico Sweden
12 guns & no 12 slabs of
slabs of bacon bacon & no guns
THANK YOU

You might also like