Smith also used the concept of absolute advantage to explain the benefits of free trade in the international marketplace. He hypothesized that the absolute advantages of countries in different raw materials would help them win simultaneously through exports and imports, making unfettered international trade even more important in the global economic framework. The concept of absolute advantage was developed by 18th-century economist Adam Smith in his book The Wealth of Nations to show how countries can benefit from trade by specializing in the production and export of goods they can produce more efficiently than other countries. Countries with an absolute advantage may choose to specialize in the manufacture and sale of a particular good or service and use the funds generated to purchase goods and services from other countries. Absolute benefit can be compared to comparative advantage when a producer has a lower opportunity cost of producing a good or service than another producer. Opportunity cost is the potential benefit that an individual, investor or company misses when choosing one alternative over another. The measure of absolute benefit is the ability of an absolute unit to produce goods with fewer resources compared to another similar entity. Consuming fewer resources, driving lower production and operating costs, and generating more yields means it is better in production than others. Access to better technology, cheaper labour or more efficient production operations and values is a no-brainer. This is a good way to make comparisons between the ability of individuals, firms and nations to produce goods by consuming resources. Since Adam Smith postulated this theory, it has been used as one of the basic measures to compare international trade in the economic field. Smith postulated that countries focus on specialization in the production of goods over which they have an absolute advantage. The theory also suggests that countries export these goods, which are produced at low cost and effort, and import goods in the manufacture of which they have no absolute advantage, from countries that do.
It also helps keep the fuel of international trade on fire. But this theory in its basic form is too simple to explain international trade. For example, if country X produces oil for $10 a barrel and coal for $12 a tonne, while country Y produces oil for $12 a barrel and coal for $15 a tonne, there could be no trade between the two. This is obviously wrong, as the actual trading scenario shows. According to the theory of absolute advantage, country X would have nothing to gain in trade with country Y. Thus, it was concluded that international trade is carried out by comparative advantage as opposed to strict adherence to absolute advantage. In his book The Wealth of Nations, the famous economist Adam Smith raised the question of why countries trade goods. In answering the question, he theorized that some nations have an advantage in the production of some goods, but not all. Selling their best goods to buy other goods that are better produced elsewhere is the first basis of international trade. He chose time – or the number of hours of work required to do a good – as the basic requirement for measuring absolute benefit.
Mercantilists believe that countries should strive to have the largest possible favourable trade balance by maximizing the difference between their imports and exports. A country that produces the largest number of goods to export, while its imports are low, has a favorable trade balance, since the price difference is paid in gold standard. Conversely, countries that are unable to produce valid goods have to import them from other countries, resulting in a negative trade balance. Smith criticized this view, believing that a country`s well-being depended on meeting the needs of its people, and therefore spending on goods while boosting international trade was the way to go. He argues that production and consumption are the key factors in acquiring wealth, and explains that people`s needs and the cost of social welfare must be prioritized. This is how it arrives at the theory of absolute advantage and how it is beneficial for all countries involved in international trade. The absolute benefit can be achieved by creating the good or service at a lower absolute cost per unit with a smaller number of inputs or through a more efficient process. Let`s take the fictitious example of Brazil against China in the production of coffee and clothing. Brazil takes 30 hours to produce a bag of coffee, while China takes 60 hours to do the same. China takes 10 hours to make a garment, while Brazil takes 40 hours to do the same. Given the number of hours of labor it takes each country to produce these goods as a homogeneous source, Brazil has the absolute advantage in coffee making, while China has the absolute advantage in clothing manufacturing. Smith`s theory falters when a particular country has the absolute advantage of producing the maximum amount of goods.
In this case, the country would be almost self-sufficient and does not need to participate in international trade. To counter this error, the economist David Ricardo proposed the theory of comparative advantage which, in addition to the number of hours worked, also takes into account the opportunity cost of producing goods. As a result, countries rely on the relative advantage of commodity production to participate in international trade. Very simply and clearly explained (my specific interest was the absolute and comparative advantage). First, let`s get a little more vocabulary. It is said that someone who can do something better has an absolute advantage. Michael Jordan has an absolute advantage in basketball. As far as I know, Michael Jordan may also be the fastest typist in the world, which gives him an absolute edge when typing. Since he can type better than you, can`t he type cheaper than you? In other words, if someone has an absolute advantage in something, doesn`t they automatically have a comparative advantage in it? The concept of absolute advantage was first introduced in 1776 in the context of international trade by Adam Smith, a Scottish philosopher considered the father of modern economics. In his monumental work An Investigation into the Nature and Causes of the Wealth of Nations, he argued that to become rich, countries should specialize in producing the goods and services in which they have an absolute advantage, and engage in free trade with other countries to sell their goods.