3.3.1 Theory of absolute advantage
The theory of absolute advantage is also called the classical theory of trade. This is the economic theory of free trade and enterprise which found expression in the landmark book The Wealth of Nation in 1776. In this book Adam Smith rejected the concept of gold being synonymous with wealth. He insisted that nations benefit most when they trade goods which they produce more efficiently than anyone else, for goods which some other country produces most efficiently. For example, Australia is the world's most efficient producer of wool. It should trade with Japan , which is the world's most efficient producer of motor cars.
This concept of absolute advantage means that a nation would produce only those goods that made the best use of its natural and acquired resources and its climatic advantages. Put more succinctly, absolute advantage is the capability of one nation to produce more of a particular product than another country with the same amount of input. This begs the question of whether a country could produce several commodities at lower cost than another country. Would it wish to trade? This question was answered in 1817 by the economist David Ricardo.
Previous Page