absolute advantage

1. Classical Trade Theories
Supply Side Analysis
1. Adam Smith
Theory of Absolute Advantage
2. David Ricardo
Theory of Comparative Advantage
Demand Side Analysis
1. J. S. Mill
Theory of Reciprocal Demand

2. Theory of Absolute Advantage
Adam Smith

3. Free Trade
Division of labour enhanced in International Market
Total Output Maximised
Win-Win situation enhances international Welfare

4. Specialization:
• Specialisation among countries based on Absolute Advantage Principle.
• It is of the Nature of natural Advantage.
Specialization
Partial Specialisation
Majority of production of product having
natural Benefits but production of other
products is also done
Complete Specialisation
No production of other products than having
Natural Benefits

5. Assumptions:
1. 2 X 2 X 1 Model
2. Factors of production are Fully Employed.
3. Constant returns to Scale in production.
4. No Transportation Cost.
5. All Labour Units Are Homogenous.
6. Free Trade: No barrier as tariff or Quota exist.
7. Labour is the only Factor of production.

6.  Production of One unit of Labour
Hence, Absolute advantage for:
Nation A – Food
Nation B- Cloth
Nation A Nation B total
Food 20 unit 10 Unit
= 30 unit
Cloth 6 Unit 8 Unit
=14 unit

7.  Production of One unit of Labour
Nation A Nation B total
Food 20 unit 10 Unit
=40 unit(new)
Cloth 6 Unit 8 Unit
= 16 unit (New)

8. Major Drawback:
If one country is advanced and another is backward , than this situation can not be
explained with this theory.