Absolute Advantage

Origin of the theoryThe 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.

Absolute AdvantageExport 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

The Theory of Absolute Advantage: An Example

Wine 2 1

Clock radios

3 5

France Japan

OUTPUT PER HOUR OF LABOR

Assumptions Two Commodities and two countriesAssumes 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 countriesFull employment.

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Abhilash.KP11103