Absolute Advantage Theory

Traditional and contemporary Economists have over time come up with various theories pertaining the variables of economics; factors of production. The theory of absolute advantage is one of them and was first advocated by Adam Smith in 1776 though his book The Wealth of Nations. This theory is pegged on two aspects; division of labour and specialization in production and explains their importance in the economy. The theory claims that if a given individual or country is absolutely efficient in the production of a good compared to another, they are deemed to have absolute advantage of that particular good.

The absolute advantage theory is based on the following assumptions;

• There is no existence of barriers in trading of goods.
• That the imports must equal the exports, implying that there will be no trade surpluses, deficits or any imbalances.
• That labour is to be considered as the only relevant factor of production.
• That Constant Returns to Scale is applicable in production. This implies that there are constant returns- any change in inputs translates to a proportionate change in the output.
• Only one currency is involved hence no exchange rates involved.
• That there is no movement of factors of production from one country to another.

Summarily, Smith’s theory applies the principle of opportunity cost principle to individuals and to the nations including their international commercial policies attributing to the fact that a country is better off importing goods from a country that produces them efficiently and direct its resource to the production of those which it produces efficiently. Moreover, if regulations are favoring a certain industry, it is likely to draw resources from another industry which could have utilized them better.