Major Trade Theories

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Trade theories Introduction The concept of absolute advantage is one of the most fundamental areas of concern in the study of economics. In its basic meaning, absolute advantage refers to the ability of one individual or party to produce more of a particular good or service than other competitors given the same amount of resources. In this regard, absolute advantage becomes a very important aspect in the concept of international trade as it clearly defines the different areas where countries should specialize in order to maximize their productivity and enhance international trade. The principle of absolute advantage was first elucidated by Adam Smith in his study of international trade using labor and capital as the only factor inputs(Free, 2010). Discussion Considering that absolute advantage is determined by the comparison between the productivities of labor, it is therefore possible that one party can be disadvantaged to have no absolute advantage in anything. In such a case, it is normally realized that no trade can occur between such a party and other parties. Absolute advantage is normally contrasted with the theory of comparative advantage which means that one party has the ability to produce a particular good or service cheaply or at a lower opportunity cost. In any case, the two theories rely on the basic concept of economic advantage which refers to the ability of one group or party to realize the same output with more economy than another party. Absolute
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