Absolute advantage Adam Smith

December 6, 2017
Purposes of Trade Theories
  • Comparative Advantage. On Econlib. A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.

    Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?.

    Comparative Advantage, by Donald J. Boudreaux. Concise Encyclopedia of Economics If Ann spends all of her working time gathering bananas, she gathers one hundred bunches per month but catches no fish. If, instead, she spends all of her working time fishing, she catches two hundred fish per month and gathers no bananas. If she divides her work time evenly between these two tasks, each month she gathers fifty bananas and catches one hundred fish. If Bob spends all of his working time gathering bananas, he gathers fifty bunches. If he spends all of his time fishing, he catches fifty fish. Table 1 shows the maximum quantities of bananas and fish that each can produce.

    If Ann and Bob do not trade, then the amounts that each can consume are strictly limited to the amounts that each can produce. Trade allows specialization based on comparative advantage and thus undoes this constraint, enabling each person to consume more than each person can produce.

    Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage, by Russ Roberts on Econlib We all have a good intuitive understanding of the power of trade. At the simplest level, if you have something I want and if I have something you want, and we trade we each other, we're both better off.

    So if I can knit and you can't, and if you can grow corn and I can't, it obviously makes sense for me to swap one of my sweaters for some of your corn. You and I might argue about the "price"—how many ears of corn one of my gorgeous sweaters is worth—but once the deal is done, you're warmer and I'm on my way to being less hungry.

    Trade seems simple.

    Almost two hundred years ago, David Ricardo discovered something not so simple about trade that came to be called comparative advantage. Here is a story that will let us explore the mysteries of trade together.

    Comparative Advantage, by Dwight Lee. At CommonSenseEconomics.com. Absolute Versus Comparative Advantage: The most straightforward case for free trade is that countries have different absolute advantages in producing goods. For example, because of differences in soil and climate, the United States is better at producing wheat than Brazil, and Brazil is better at producing coffee than the United States. Obviously both countries are better off when Americans produce wheat and exchange a portion of it for some of the coffee that Brazilians produce.

    But does this mean that a country with an absolute advantage in the production of a good should always produce that good rather than import it? No, as the English economist David Ricardo first explained in the early 1800s. A country can have an absolute advantage in the production of a good without having a comparative advantage. Comparative advantage is what determines whether it pays to produce a good or import it.


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