Theory of Absolute Advantage

The theory was introduced in Adam Smith’s “Wealth of Nations”, published in 1776. By assuming that each country could produce some commodities using less labour than its trading partners, he showed that all parties could benefit from international trade. Trade improved the allocation of labour, ensuring that each good would be produced in the country where the good’s production required the least labour. Result would be a larger total quantity of goods produced in the world. Trade would be a positive-sum game. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at a lower cost or with a higher productivity. If the input prices are the same in both countries, the country with an absolute advantage will have lower unit production cost for that good. A country should produce and export products in which it has an absolute advantage, and a country should import products in which it has a disadvantage.