Adam Smith first proposed the theory of absolute advantage in his 1776 publication "An Inquiry into the Nature and Causes of the Wealth of Nations" as a rebuttal to mercantilism. The theory argues that countries should specialize in and export goods they can produce at a lower relative cost than other nations, and import goods that other nations can produce at a lower cost, resulting in more global production and wealth overall. An example shows that France has an absolute advantage in wine production while Japan has an advantage in clock and radio production based on their differing labor outputs.

2. 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.

3. 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

4. The Theory of Absolute Advantage: An
Example
OUTPUT PER HOUR OF LABOR
France Japan
Wine 2 1
Clock 3 5
radios

5. 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.

6. Abhilash.K
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