The theory of absolute advantage suggests that a nation should produce products that exploit its readily available resources, resulting in increased efficiency and cost savings. The nation with the highest productivity has the advantage, inspiring trade. The theory was created by Adam Smith in 1776 and is often considered with the theory of comparative advantage.
Absolute advantage theory is the belief that a nation will get the most out of producing products that exploit its most readily available resources. It is believed that easier access to particular materials, skill sets, and other similar elements will make the country better suited for a specific type of production. The benefits of this theory may include increased efficiency and cost savings. When a nation has an absolute advantage, it has something desirable to other nations, which inspires trade.
According to the theory of absolute advantage, over two or more parties, the one that produces more products with the same resources has the advantage. For example, if two companies each have five employees and one can produce ten units per hour while the other can produce twelve units in the same period, the second company has the absolute advantage. A nation following the theory of absolute advantage would produce the products that work best with its resources.
One of the simplest ways to demonstrate the theory of absolute advantage is to compare the labor productivity of two nations in a given area. The absolute advantage will go to the nation that is able to maintain the highest level of productivity. While the factors contributing to that productivity may vary, the essential theory remains the same.
The theory of comparative advantage is often considered together with the theory of absolute advantage. The theory of comparative advantage can also be demonstrated with two nations producing the same object. The country that can produce the item more efficiently can sell it to the country that can make the same product, but at a higher cost. While the first country has a comparative advantage because it benefits from the sale of the goods, the second country benefits because it costs less to import that product than it does to make it.
The theory of absolute advantage was created by Adam Smith in 1776. He discussed the idea in his book An Inquiry into the Nature and Cause of the Wealth of Nations. Smith basically suggested that a nation with an absolute advantage with a given product could use profits from trade to buy items that other countries could produce more efficiently. His general argument was that a nation should not hesitate to trade with other countries, because it was foolish to pay more to make something domestically produced that could be bought for less internationally.
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