Theory of Absolute Advantage, Adam Smith's Trade Theory, Assignment Help

International Economics - Theory of Absolute Advantage, Adam Smith's Trade Theory,

International Economics >> Theory of Absolute Advantage

The first classical theory of interna­tional trade was propounded by Adam Smith, the founder of classical economics. His theory is known as the Theory of Absolute Advantage.


It may be possible for all the countries to produce all the commodities they need, in spite of resource constraint. But, the cost of production of goods for which a coun­try is deficient in its resources would be exorbitantly high. It is better to import such goods rather than produce them. Most Countries therefore tend to specialise in producing commodities in which they have absolute advantage in cost of pro­duction. Therefore, most countries export goods which they can produce at a lower cost and import what they can produce' at a higher cost. This common sense logic of international division of labour suggested by Adam Smith marks the beginning of modern theories of foreign trade.

The theory of absolute advantage states that the basis of trade between the nations is the absolute advantage a country has in producing a commodity over the other countries. In simple words, two countries are able to trade between them because each one of them is able to produce at least one commodity at a compara­tively lower cost.

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