what is absolute advantage theory?? explain theory by my map method

what is absolute advantage theory??
explain theory by my map method

Expert Solution

Theory of Absolute Cost Advantage

The theory of absolute cost advantage was propounded by Adam Smith (1776), arguing that countries gain from trading, if they specialize according to their production advantages. His doctrine may be understood with an example presented in the table below.

Labour Cost of production (in Hours)

	One Unit of Good A	One Unit of Good B
Country I	10	20
Country II	20	10

The above table shows that, in the absence of trade, both the goods are produced in both the countries, because of their demand in the domestic markets. The cost of production is determined by the amount of labor required in the production of the respective goods. The greater the amount of labor, the higher will be the cost of production, and the commodity will have a larger value in exchange. The pre-trade exchange of the ratio in Country I would be 2A = 1B and in Country II it will be 1A = 2B.

Rahul Sunny answered 1 year ago

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