Absolute advantage

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  • 1. Origin of the theory The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves.
  • 2. Absolute Advantage Export those goods and services for which a country is more productive than other countries. Import those goods and services for which other countries are more productive than it is. Country should concentrate on production of goods in which it holds an absolute advantage. Measures nations wealth by the standard of living of its people
  • 3. The Theory of Absolute Advantage: AnExample OUTPUT PER HOUR OF LABOR France Japan Wine 2 1 Clock 3 5 radios
  • 4. Assumptions Two Commodities and two countries Assumes total world production and emphasis on efficiency. No transportation cost between and within the country. Factors are easily mobile within a country and immobile between the countries Full employment.
  • 5. Abhilash.KP11103