This document summarizes key economic concepts from a class presentation, including theories of trade, specialization, opportunity cost, and the contributions of Adam Smith and David Ricardo. It explains that Adam Smith defined trade as the exchange of goods based on the human propensity to barter. David Ricardo expanded on Smith's ideas of absolute advantage by developing the theory of comparative advantage, which shows that countries can benefit from trade even if one country is more efficient in all areas of production. The document provides examples to illustrate absolute and comparative advantage between two parties producing different goods.

1. A class presentation by
Olabode Desire

2.  Theory:
It can be defined as a belief that can guide
behaviour or a well-substantiated
explanation of some aspect of the natural
world; an organized system of accepted
knowledge that applies in a variety of
circumstances to explain a specific set of
phenomena.

3.  Trade:
According to a definition given by wealth of
Nations (WN ), a book written by Adam
Smith; trade is the consequence of the
human “propensity to truck, barter, and
exchange one thing for another.

4.  Specialization:
In international trade, specialization refers
to a country’s decision to major in the
production of a certain good or list of goods
because of the advantages it possesses in
their production.
 Opportunity
cost:
refers to what you sacrifice in making an
economic choice.

5.  Adam
Smith and David Ricardo (Great
philosophers).
 Adam Smith (5 June 1723 – 19th July, 1790)
was a Scottish moral philosopher and a
pioneer of political economy. The ideas that
became associated with Smith not only
became
the
foundation
of
the
classical school of economics but also gained
him a place in history as the father of
economics. His work served as the basis for
other lines of inquiry into the economics
field, including the theory of absolute
advantage and even after his death, his great
ideas he promoted lives on.
 In 2007, the Bank of England placed his
image on the £20 note.

6. ADAM SMITH
(5 June 1723 – 19th July, 1790)

7.  David
Ricardo
David Ricardo, a British, lived between 18-41772 and 11-09-1823. Ricardo’s interest in
economic questions arose in 1799 when he
read Adam Smith’s Wealth of Nations.
David Ricardo’s aspects that made him to be
known across the world is his contribution
to the law of comparative advantage. He
wrote his first economics article at age
thirty-seven and then spent the following
fourteen years—his last ones—as a
professional economist.

8. DAVID RICARDO
18th April -1772 to 11th September-1823

9. ABSOLUTE ADVANTAGE –
 This theory was developed by
Adam Smith to counter
Mercantilism (Zero-sum game)
while ‘AA’ is a positive -sum game.

Talks about who can do it better,
cheaper and quicker.

10. 

AA’ says that one country would have an
absolute advantage over the other if it can
produce same amount of goods or greater
output of a good or service than other
countries using the same amount of
resources or even less.
EXAMPLE
‘
Party A can produce 5ton of cassava per hour with 6
employees and
 Party B can produce 10ton of cassava per hour with
6 employees.

Assuming that the employees of both parties
are paid equally, Party B has an absolute
advantage over Party A in producing cassava
per hour. This is because Party B can
produce twice as many cassava as Party A
can with the same number of employees.

11. COMPARATIVE ADVANTAGE
Comparative advantage refers to the
ability of a party to produce a
particular good or service at a lower
marginal and opportunity cost over
another.
The conclusion drawn is that each
party can gain by specializing in the
good where it has comparative
advantage, and trading that good for
the other.

12. Even if one party is more efficient in the
production of all goods (absolute advantage in
all goods) than the other, both countries will still
gain by trading with each other, as long as they
have different relative efficiencies.
EXAMPLE – 2 parties producing 2 commodities
with the same resources, time, all factors been
equal. Output as shown below:
Party A- 1000tons of cassava, 2500tons of cotton.
 Party B - 1000tons of cassava, 1000tons of cotton.


13. SIMILARITIES
 Both theories supports Free Trade approach
unlike the mercantilism theory.
 Both theories elucidates a concept of
Division of labour.
 They talk about gains for both home and
host country.( positive sum game).
 Specialization.
 Among others.

14. Thank
you.