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    Ch.3: Liberalism: Absolute Advantage Theory

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    Ahmed Elfeqi
    This document discusses Adam Smith's absolute advantage theory and Ricardo's comparative advantage theory of international trade. [1] Adam Smith argued that countries should specialize in goods where they have an absolute advantage in production and trade with other countries. [2] Ricardo further developed this theory by introducing the concept of comparative advantage, showing that even if a country does not have an absolute advantage, it can still gain from trade by specializing in goods where it has a lower relative production cost. [3] Through specialization and trade based on comparative advantages, both countries can gain and benefit from international trade.

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    Ch.3: Liberalism: Absolute Advantage Theory

    Uploaded by

    Ahmed Elfeqi
    23 views1 page
    This document discusses Adam Smith's absolute advantage theory and Ricardo's comparative advantage theory of international trade. [1] Adam Smith argued that countries should specialize in goods where they have an absolute advantage in production and trade with other countries. [2] Ricardo further developed this theory by introducing the concept of comparative advantage, showing that even if a country does not have an absolute advantage, it can still gain from trade by specializing in goods where it has a lower relative production cost. [3] Through specialization and trade based on comparative advantages, both countries can gain and benefit from international trade.

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    economics course

    Original Title

    Ch.3 part 2 A3 7ekok

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    This document discusses Adam Smith's absolute advantage theory and Ricardo's comparative advantage theory of international trade. [1] Adam Smith argued that countries should specialize in goods where they have an absolute advantage in production and trade with other countries. [2] Ricardo further developed this theory by introducing the concept of comparative advantage, showing that even if a country does not have an absolute advantage, it can still gain from trade by specializing in goods where it has a lower relative production cost. [3] Through specialization and trade based on comparative advantages, both countries can gain and benefit from international trade.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    23 views1 page

    Ch.3: Liberalism: Absolute Advantage Theory

    Uploaded by

    Ahmed Elfeqi
    This document discusses Adam Smith's absolute advantage theory and Ricardo's comparative advantage theory of international trade. [1] Adam Smith argued that countries should specialize in goods where they have an absolute advantage in production and trade with other countries. [2] Ricardo further developed this theory by introducing the concept of comparative advantage, showing that even if a country does not have an absolute advantage, it can still gain from trade by specializing in goods where it has a lower relative production cost. [3] Through specialization and trade based on comparative advantages, both countries can gain and benefit from international trade.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Dr.

    Ahmed El-Feqi Second: Ricardo (Comparative Advantage Theory)

    Ch.3: Liberalism - Liberal view & freedom.


    - Opposed to restriction on foreign trade.
    Adam Smith: Absolute Advantage Theory - Free markets raise productivity & encourage innovation.
    - Free international trade creates mutual advantage for all partners.
    Philosophy:
    - Free individual foster productive capacity. England Portugal
    - Self- interest lead individual to specialization and division of labor. Cloth 4 7
    wine 5 6
    - - Specialization achieves productivity gains.
    - Opposed to imposing restrictions on international trade.

    The theory: 1) To produce cloths: England needs 4 hrs & Portugal needs 7 hrs
    So, England has absolute advantage in cloth
    - Countries should specialize in goods in which they had an absolute advantage,
    And export it to the trading partner. 2) To produce wine :
    - And import goods that the trading partner had an absolute advantage in it. England needs 5 hrs, Portugal needs 6 hrs
    So, England has absolute Advantage in wine.
    England Portugal England has absolute advantage in both goods: cloth and wine
    Cloth 3 hrs/ unit 7 hrs/ unit
    But, Depending on Comparative Advantage both countries still benefit from trade.
    wine 7 hrs/ unit 4 hrs/ unit
    - Absolute advantage mean: the cost incurred to produce a unit of a product. Comparative advantage means: relative efficiency across goods.
    - From the above table: 4
    Or: The ratio between the cost of 1 unit of both goods in the same country ¿ 5
    - Cloth: England can produce it in 3 hrs, while Portugal produce it in 7 hrs.
    So, England has a comparative advantage in cloth than wine because the relative
    - So, England needs less labor hours to produce a unit of cloth, This means:
    cost in England is less than the relative cost in Portugal.
    The cost of cloth is cheaper in England (less cost).
    - Then, England has absolute advantage in cloth. Then, England will specialize in cloth and export it to Portugal, then import
    - SO, England Specialize in producing cloth and export it to Portugal. wine from Portugal.
    - England saves (gains) 4 labor hours when export 1 cloth and import 1 wine - The Gains from trade:
    From Portugal. - England will gain (save) 1 hour and Portugal gains 1 hour as well.
    - Portugal will gain 3 labor hours from trade with England. - So Ricardo concluded that if one country has absolute advantage in both goods,
    - Conclusion: International trade is mutual benefit for all countries. then trade still in the interest of both countries.

    Dr. Ahmed El-Feqi 1-


    Masters in Economics, UEA, England

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