Absolute advantage

In economics, the principle of absolute proceeds is the ability of a party an individual, or firm, or country to draw a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle of absolute expediency in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to take no absolute advantage in anything.

Origin of the theory

The concept of absolute advantage is generally attributed to the Scottish economist Adam Smith in his 1776 publication The Wealth of Nations, in which he countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import & instead stated that any nations would gain simultaneously whether they practiced free trade and specialized in accordance with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves.

Because Smith only focused on comparing labor productivities to creation absolute advantage, he did not established the concept of comparative advantage. While there are possible gains from trade with absolute advantage, the gains may non be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges.