International Trade Theory: Second Theory of Absolute Advantage
International Trade Theory
2nd STAGE/ 2nd THEORY Absolute Advantage
Smith attacked mercantilist assumption that trade is a zero-sum game by argued that countries differ in their ability to produce goods efficiently. Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
Therefore, countries should specialize in the production of goods for which they have an absolute advantage & then trade these for goods produced by other countries. Thus, this theory argued that a country should never produce goods at home that it can buy at a lower cost from other countries. By specializing in the production of goods in which has an absolute advantage, both countries benefits by engaging in trade. So, trade is a positive-sum game and it produces net gains for all involved.
3nd STAGE/ 3nd THEORY Comparative Advantage
*further exploring what might happen when one country has an absolute advantage in the production of all goods.
Smith theory of absolute advantage suggests that such country might derive no benefits from international trade. Ricardo’s theory of comparative advantage argued that this was not the case and it is makes sense for a country to specialize in the production of those goods that it produces most efficiently & to buy the goods that it produces less efficiently from other countries, even if this means buying the goods from other countries that it could produce more efficiently itself. So, comparative advantage arises from differences in productivity.
Besides, the basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade. This theory suggests that consumers in all nations can consume more if there are no restricted on trades. This occurs even in countries that lack an absolute advantage in the production of any good. Thus, this theory suggest
2nd STAGE/ 2nd THEORY Absolute Advantage
Smith attacked mercantilist assumption that trade is a zero-sum game by argued that countries differ in their ability to produce goods efficiently. Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
Therefore, countries should specialize in the production of goods for which they have an absolute advantage & then trade these for goods produced by other countries. Thus, this theory argued that a country should never produce goods at home that it can buy at a lower cost from other countries. By specializing in the production of goods in which has an absolute advantage, both countries benefits by engaging in trade. So, trade is a positive-sum game and it produces net gains for all involved.
3nd STAGE/ 3nd THEORY Comparative Advantage
*further exploring what might happen when one country has an absolute advantage in the production of all goods.
Smith theory of absolute advantage suggests that such country might derive no benefits from international trade. Ricardo’s theory of comparative advantage argued that this was not the case and it is makes sense for a country to specialize in the production of those goods that it produces most efficiently & to buy the goods that it produces less efficiently from other countries, even if this means buying the goods from other countries that it could produce more efficiently itself. So, comparative advantage arises from differences in productivity.
Besides, the basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade. This theory suggests that consumers in all nations can consume more if there are no restricted on trades. This occurs even in countries that lack an absolute advantage in the production of any good. Thus, this theory suggest