Absolute Advantage By Adam Smith

1507 Words Sep 13th, 2016 7 Pages
Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that same good or service. The 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 Ricardo (International Encyclopedia of the Social Sciences, 2007). Adam Smith, the classical economist who was a lead a leading advocate of free trade on the grounds that supported the international trade of labor, founded his concept of cost on the labor theory of value within each nation that labor is the only factor of production and is homogeneous and the cost of a good depends exclusively on the amount of labor required to produce it (Carbaugh, 2014). Smith’s trading concept of absolute advantage for two-nation and two-product world explains that the international trade will be beneficial when one nation has an absolute cost advantage in one good and another nation has an absolute cost advantage in another good. In short, each nation benefits by specializing in the production of the good that it produces at a lower cost than the other nation, while importing the good that it produces at a higher cost (Carbaugh, 2014).
However, Smith argued that it was totally impossible for all nations to become rich simultaneously by following mercantilism because it is possible…

More about Absolute Advantage By Adam Smith

Open Document