international trade theory

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nishant singh

Business Technology

• Mercantilism
• Comparative advantage
•Absolute advantage
• The product life cycle
• Factor proportions theory

Adam smith
Absolute advantage
labour labour

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.

• Party A can produce 5 widgets per hour with 3
employees.
• Party B can produce 10 widgets per hour with
3 employees.

Smith also asserted that country-specific advantages
can either be
natural acquired

Natural advantage
• climatic conditions
• access to particular resources
• the availability of labor

acquired
• a distinct advantage in skills
• technology
• capital assets

if one country has an absolute advantage in
both products
NO TRADE WOULD OCCUR
Absolute advantage’s flaw:
?

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India looks at regional trading arrangements (RTAs) as “building blocks” towards the overall objective of trade liberalization. Therefore, it is participating in a number of RTAs which include structures such as free trade agreements (FTAs), preferential trade agreements (PTAs), and comprehensive economic cooperation agreements (CECAs). Free Trade Agreement A free trade agreement among two countries or group of countries agrees to abolish tariffs, quotas and preferences on most of the goods (if not all) between them. Countries choose an FTA if their economical structures are complementary, not competitive.

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The trade theory that first indicated importance of specialization in production and division of labor is based on the idea of theory of absolute advantage which is developed first by Adam Smith in his famous book The Wealth of Nations published in 1776. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges. Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country producing it. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries In economics, principle of 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.

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