Economic History

History of absolute advantage theory

The ability to provide a good or service with the same number of inputs per unit of time as competitors are referred to as the absolute advantage. When examining the history of international trade, one of the first trade theories that come to anyone’s mind is Adam Smith’s “absolute advantage” trade theory. 

When did Adam Smith come up with absolute advantage?

This idea was first introduced by Adam Smith in 1776 in his book “Wealth of Nations.” In his book, Adam Smith encouraged free trade by comparing nations to individuals. This was a response to the mercantilist ideas that prevailed at that time.

According to Adam Smith, people do not produce everything they need by themselves. Instead, they produce the goods that they are good at producing. The surplus of that product is then exchanged with others to buy the other goods they need. Consider a farmer, while farming, he can also produce the tools he needs. Such as the hoe or shovel, but he does not. He spends his entire time farming and purchase the equipment he needs from the blacksmith. This process increases the total production. When a farmer spends his time farming, he will learn the best ways to do that. Ultimately this would increase his productivity and production.

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost . . . more to make than to buy. The tailor does not attempt to make his own shoes, but buys them from the shoemaker.

. . .What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry, employed in a way in which we have some advantage…

Adam Smith – “Wealth of Nations

According to Adam Smith, if the individuals can benefit from the exchange, so as the countries. Therefore, if a country can produce something better than its neighbors, it can produce that good and exchange it for the goods which they are not good at producing. This idea is the basis of the Absolute advantage trade theory.

Theory of Absolute Advantage

The absolute advantage is the ability of one country to produce a commodity with greater efficiency than another. The Absolute advantage is important for a country to identify its trade potential. According to the Absolute Advantage Theory, a country should specialize in the production of goods which they have an absolute advantage and export it and import the goods with absolute disadvantages.

Example – Assume that the USA is efficient at producing wheat than Bangladesh, and Bangladesh is better at producing textile. Here according to the Absolute advantage theory, both countries can specialize in producing what they are efficient, and exchange some of it for the commodity that they are inefficient. That means the USA can specialize in producing wheat and exchange the surplus for textile produced in Bangladesh.

This way, total output and the welfare of both countries are maximized, and all the nations can gain from trade. Such trade will result in a Win-Win outcome for both countries (Not a Zero-sum game).

Impact of Absolute advantage to the international trade

Absolute advantage trade theory was successful in changing policymakers’ perceptions about international trade. Prior to absolute advantage, international trade was exclusively based on the Mercantalists’ perspective on international trade. Mercantilism viewed international trade as a threat, forcing countries to adopt more protectionist policies. Absolute advantage, on the other hand, highlighted the good consequences of international trade. As a result, global trade grew in the 18th and 19th centuries.

What is difference between absolute and comparative advantage?

David Ricardo’s comparative advantage trade theory addressed some of Adam Smith’s absolute advantage trade theory’s flaws. According to the Absolute advantage theory, mutually beneficial trade is impossible if one country has an absolute advantage in both products. However, according to comparative advantage, even if one country has an absolute advantage, there is still a foundation for mutually beneficial trade.

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