Absolute advantage refers to a party's ability to produce a good using fewer resources than competitors. Adam Smith first described this principle using labor as the only input. A country has an absolute advantage if it can produce more of a good than another country using the same amount of resources. While absolute advantage allows for gains from trade, comparative advantage focuses on mutually beneficial exchanges and explains how trade benefits parties even if one has an absolute advantage in all goods.
Absolute advantage refers to a party's ability to produce a good using fewer resources than competitors. Adam Smith first described this principle using labor as the only input. A country has an absolute advantage if it can produce more of a good than another country using the same amount of resources. While absolute advantage allows for gains from trade, comparative advantage focuses on mutually beneficial exchanges and explains how trade benefits parties even if one has an absolute advantage in all goods.
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Absolute advantage refers to a party's ability to produce a good using fewer resources than competitors. Adam Smith first described this principle using labor as the only input. A country has an absolute advantage if it can produce more of a good than another country using the same amount of resources. While absolute advantage allows for gains from trade, comparative advantage focuses on mutually beneficial exchanges and explains how trade benefits parties even if one has an absolute advantage in all goods.
Copyright:
Attribution Non-Commercial (BY-NC)
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Download as PPT, PDF, TXT or read online from Scribd
generally attributed to Adam Smith. 2.Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import. 3.Instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Absolute advantage Theory
Principle of absolute advantage refers to the ability
of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources Adam Smith first described the Principle of absolute advantage in the context of international trade, using labor as the only input. Absolute advantage Theory
Smith also stated that the wealth of nations depends
upon the goods and services available to their citizens, rather than their gold reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges. Absolute advantage Theory Absolute advantage Theory
• Party A can produce 5 widgets per hour with 3
employees. • Party B can produce 10 widgets per hour with 3 employees. • Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees. Absolute advantage Theory Absolute advantage Theory
Country A can produce 1000 parts per hour with 200
workers.
Country B can produce 2500 parts per hour with 200
workers.
Country C can produce 10000 parts per hour with 200
workers. Absolute advantage Theory Considering that labor and material costs are all equivalent, Country C has the absolute advantage over both Country B and Country A because it can produce the most parts per hour at the same cost as other nations. Country B has an absolute advantage over Country A because it can produce more parts per hour with the same number of employees. Country A has no absolute advantage because it can't produce more goods than either Country B or Country C given the same input. comparative advantage comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced. It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good using less resources than the other. comparative advantage Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade. comparative advantage Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. comparative advantage Despite the fact that the younger man has absolute advantage in all activities, it is not in the interest of either of them to work in isolation since they both can benefit from specialization and exchange. If the two men divide the work according to comparative advantage then the young man will specialize in tasks at which he is most productive, while the older man will concentrate on tasks where his productivity is only a little less than that of the young man. Such an arrangement will increase total production for a given amount of labor supplied by both men and it will benefit both of them.