Theory of Absolute Advantage
THEORY OF ABSOLUTE ADVANTAGE “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, [we had] better buy it of them with some part of our own industry, employed in a way in which we have some advantage.” -Adam Smith (WN, IV.ii.12)
This means that a nation produces and exports those commodities which it can produce more cheaply than other nations, and imports those which it cannot. A nation will not produce a good that is produced more expensively at home than abroad –be it “a thirtieth, or even a three hundredth part more” (WN, IV.ii.15)
In economics, absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.
Origin of the theory
During the seventeenth and eighteenth centuries the dominant economic philosophy was mercantilism, which advocated severe restrictions on import and aggressive efforts to increase export. The resulting export surplus was supposed to enrich the nation through the inflow of precious metals. Adam Smith (1776), who regarded as the father of modern economics, countered mercantilist ideas in his famous book, The Wealth of Nations, by developing the concept of absolute advantage. He argued that it was impossible for all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another
This means that a nation produces and exports those commodities which it can produce more cheaply than other nations, and imports those which it cannot. A nation will not produce a good that is produced more expensively at home than abroad –be it “a thirtieth, or even a three hundredth part more” (WN, IV.ii.15)
In economics, absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.
Origin of the theory
During the seventeenth and eighteenth centuries the dominant economic philosophy was mercantilism, which advocated severe restrictions on import and aggressive efforts to increase export. The resulting export surplus was supposed to enrich the nation through the inflow of precious metals. Adam Smith (1776), who regarded as the father of modern economics, countered mercantilist ideas in his famous book, The Wealth of Nations, by developing the concept of absolute advantage. He argued that it was impossible for all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another
References: Schumacher, Reinhard. “Smith’s Absolute Advantage”. Erasmus Journal of Philosophy and Economics. Vol.5. Germany. 54-80. Gabay., et al. Economics: Its Concepts and Principles (with Agrarian Reform and Taxation). Manila: Rex Bookstore Inc, 2007. Das, Monica. “Absolute Advanrage”. Internaltonal. Encyclopedia of the Social Sciences. 2007. “Absolute Advantage.” Wikipedia. Wikipedia. 27 Aug. 2013 Submitted by: Rove Jay P. Tuñacao BSEd-Social Science III