International Trade Theory Of Comparative Advantage And Absolute Advantage

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Several theories about international trade explain why countries have the opportunity to trade, theory of comparative advantage and absolute advantage. Adam Smith came up with the theory of absolute advantage where the country that produces more of one good that another country has simply an absolute advantage over it. This theory normally constructed with two commodities and two countries. In Schuhmachers article “Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics” he says, “each nation can produce one good with less expenditure of human labor than the other and thus more cheaply.” (Schuhmachers, 2012) In this case, both countries will specialize in only producing the commodity, which they have…show more content…
This means it does not matter if country A can produce more overall than country B, as long as B can produce it more efficiently than country A. Country B will choose to produce that product and then trade it with country A. When a country focuses on a good that it is efficient in producing for a lower price then they increase national income and company’s increase profits. An example of comparative advantage: Country A can produce 28 bikes and 4 radios, Country B can produce 32 bikes and 12 radios. Country B has an absolute advantage in both products but it has a comparative advantage specifically in radios because it can efficiently produce 3 times more for less than Country A (Economics Online, 2017.)
Both theories have the positive effect of making economies that trade grow. Trade makes a price range below the local price possible. Furthermore, the exporting country can produce more and the importing country can use its resources on other products in which it is better at producing. However, because trade prices of foreign goods are lower local goods will experience lower demand. This is one of the reasons for a trade restriction-- the government of a country will help maintain local businesses.
Factor Proportion theory was originally created by two Swedish economists. "According to this theory, one condition for trade is that countries differ with respect to the availability of the factors of production. They
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