Absolute advantage

The model of absolute cost advantages is the core idea of classical trade theory. The economist Adam Smith developed this theory in 1776 in his book An Inquiry into the Nature And Causes of the Wealth of Nations (shortened German Title: Wealth of Nations ). It states that foreign trade and international division of labor to bring all the countries involved benefits. To this end, each country should specialize in the production of those goods which it can produce more cost-effective than other countries, ie in which it has an absolute cost advantage.

Foreign Trade and absolute cost advantage

In the fourth book of the work Wealth of Nations, Smith points out that each country should produce the goods that it can produce absolutely cheaper than abroad. In trade with the other countries, it can exchange for other goods then. Ultimately benefit by specializing as was all involved in foreign trade countries. The limited availability of factors of production ( capital and labor ) are more productive use than pure self-sufficiency of each country, so that by the foreign trade ultimately each country more goods obtained as in a self-sufficiency and thus a profit of welfare ( economic welfare ) achieved. This fact can make it clear by a simple example.

Example

In this example, the two countries France and Ireland occur. Ireland is in a position to produce a unit of clothing in 10 hours, France needed for 20 hours. In return, France, a unit of coal in 10 hours ago, what Ireland needs 20 hours. So France has an absolute cost advantage in the production of coal and Ireland in clothing. The conditions can be summarized in a table:

At a labor input of 60 hours each country could produce for self-sufficiency per two units of clothing and coal. In total, 4 units of coal and 4 units of clothing were available. But specialized in Ireland in the production of clothing, it could produce 6 units of clothing, France specialization is accordingly 6 units of coal. If there is now foreign trade and exchange the two countries 3 units 3 units of clothing against coal, as would any country by the foreign trade per 3 units of clothing and coal. This represents an increase of 50 % compared to the self-sufficiency, which demonstrates that specialization connected with foreign trade every state will benefit.

Receivables

From the model of absolute cost advantages, a number of demands to the participating countries arise. As made ​​clear in the case, to waive the collection of customs duties or other trade barriers each country, so that the foreign trade comes about and the prosperity of both countries increases.

Each country also has to focus on the production of such goods in which it actually has an advantage. Specialized in the above example, France on clothing production and Ireland to the mining of coal, so each country would end up just 1.5 units of clothing and coal, a reduction of 25 %.

Importance of theory

With his model of absolute cost advantages, Adam Smith opposed the strategies of mercantilism and founded classical trade theory. In the mercantilist system of each country was striving to prevent the import of finished products and produce them yourself instead and to export larger quantities of precious metals, ie To gain money. This was accompanied by an appropriate tariff policy. The foreign trade of mercantilism was a zero -sum game in which a country could gain only at the expense of another. Adam Smith held the mercantilism, in particular the pursuit of increasing the precious metal stocks harmful. An increase in precious metal stocks, which served at the time as funds, raise only the prices of the goods. The wealth of a nation 'll not be measured on precious possession, but on the quantity of goods that was available, and thus on the job performance. The first sentence of The Wealth of Nations expresses this:

"The annual labor of every nation is the fund Which originally supplies it with all the necessaries of life and Conveniences Which It Consumes Annually, and Which Consist Either always in the immediate produce of labor did, or in what is purchased with did produce from other nations. "

Problems and development

The theory of absolute cost advantages, however, has the disadvantage that it explains only trade that exists between countries with reciprocal absolute cost advantages. If a country with no such good benefits, it would decrease after the theory of absolute cost advantages not participate in international trade. With his theorem of comparative advantage David Ricardo provided an explanation why even those countries should participate in the foreign trade. He extended the ideas of Adam Smith.

• Trade theory
• International Trade
• Adam Smith