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    What Is Absolute Advantage?: Adam Smith and The Theory of Absolute Advantage

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    Nicki Lyn Dela Cruz
    Adam Smith introduced the concept of absolute advantage in his seminal work "The Wealth of Nations" in 1776. Absolute advantage refers to a country's intrinsic ability to produce a good at a lower opportunity cost than competitors. Smith argued that countries should specialize in producing goods where they have an absolute advantage and trade for other goods, allowing all countries to gain. He believed differences in technology between nations drove international trade patterns. Smith's theory of absolute advantage supported his argument for laissez-faire policies and unrestricted international trade.

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    What Is Absolute Advantage?: Adam Smith and The Theory of Absolute Advantage

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    Nicki Lyn Dela Cruz
    181 views1 page
    Adam Smith introduced the concept of absolute advantage in his seminal work "The Wealth of Nations" in 1776. Absolute advantage refers to a country's intrinsic ability to produce a good at a lower opportunity cost than competitors. Smith argued that countries should specialize in producing goods where they have an absolute advantage and trade for other goods, allowing all countries to gain. He believed differences in technology between nations drove international trade patterns. Smith's theory of absolute advantage supported his argument for laissez-faire policies and unrestricted international trade.

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    Adam Smith introduced the concept of absolute advantage in his seminal work "The Wealth of Nations" in 1776. Absolute advantage refers to a country's intrinsic ability to produce a good at a lower opportunity cost than competitors. Smith argued that countries should specialize in producing goods where they have an absolute advantage and trade for other goods, allowing all countries to gain. He believed differences in technology between nations drove international trade patterns. Smith's theory of absolute advantage supported his argument for laissez-faire policies and unrestricted international trade.

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

    What Is Absolute Advantage?: Adam Smith and The Theory of Absolute Advantage

    Uploaded by

    Nicki Lyn Dela Cruz
    Adam Smith introduced the concept of absolute advantage in his seminal work "The Wealth of Nations" in 1776. Absolute advantage refers to a country's intrinsic ability to produce a good at a lower opportunity cost than competitors. Smith argued that countries should specialize in producing goods where they have an absolute advantage and trade for other goods, allowing all countries to gain. He believed differences in technology between nations drove international trade patterns. Smith's theory of absolute advantage supported his argument for laissez-faire policies and unrestricted international trade.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    Adam Smith and the theory of Absolute Advantage

    What is Absolute Advantage?


    In economics, absolute advantage refers to the capacity of any economic agent, either an
    individual or a group, to produce a larger quantity of a product than its competitors. Introduced
    by Scottish economist, Adam Smith, in his 1776 work, “An Inquiry into the Nature and Causes
    of the Wealth of Nations,” which described absolute advantage as a certain country’s intrinsic
    capability to produce more of a commodity than its global competitors.
    Smith also used the concept of absolute advantage to explain gains from free trade in the
    international market. He theorized that countries’ absolute advantages in different commodities
    would help them gain simultaneously through exports and imports, making the unrestricted
    international trade even more important in the global economic framework.
    Smith was the first economist to bring up the concept of absolute advantage, and his arguments
    regarding the same supported his theories for a laissez-faire state. In “The Wealth of Nations”,
    Smith first points out that, through opportunity costs, regulations favoring one industry take
    away resources from another industry where they might have been more advantageously
    employed.
    Secondly, he applies the opportunity cost principle to individuals in a society, using the
    particular example of a shoemaker not using the shoes he made himself because that would be a
    waste of his productive resources. Each individual thus specializes in the production of goods
    and services in which he or she has some sort of an advantage.
    Thirdly, Smith applies the same principles of opportunity costs and specialization to international
    economic policy, and the principle of international trade. He explains that it is better to import
    goods from abroad where they can be manufactured more efficiently because it allows the
    importing country to put its resources into its own most productive and efficient industries.
    Smith thus emphasizes that a difference in technology between nations is the primary
    determinant of international trade flows around the globe.
    Assumptions of the Absolute Advantage Theory
    Smith assumed that the costs of the commodities were computed by the relative amounts of labor
    required in their respective production processes.
    He assumed that labor was mobile within a country but immobile between countries.
    He took into consideration a two-country and two-commodity framework for his analysis.
    He implicitly assumed that any trade between the two countries considered would take place if
    each of the two countries had an absolutely lower cost in the production of one of the
    commodities.

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