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Theory of Absolute Advantage

Adam Smith
by

Adam Pascual

on 6 November 2014

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Transcript of Theory of Absolute Advantage

Foundation
Definition
It simply refers to the ability of a party (an individual, or firm (Business/Company), or country) to produce more of a good or service than competitors, using the same amount of resources.
ABSOLUTE
ADVANTAGE
LET US PUT IT THIS WAY
iPhone per day
Number of Employees
TEAM
JASMIN
TEAM
DANE
3
3
5
3
So "WHO" thought
of this Stuff???
Get ready with your Reviewer!
(Big Word)
I am Adam
Smith! and I
thought of it!
- 5 June 1723, Scotland
- Moral Philosopher &
Pioneer of Political Economy
- An Inquiry into the Nature
and Causes of the Wealth of Nations
Core
A Barrel of Oil =
10 Labour Hours
A Barrel of Oil =
12 Labour Hours
Yard of Cloth =
13 Labour hours
Yard of Cloth =
11 Labour Hours
Since U.S can produce OIL more efficiently, The Oil there is CHEAPER.
Cheaper Oil and cheaper Cloth in Mexico will gain them advantage in trade.
Okay, Let's put on some
MATH shall we?
If the US and Mexico opened trade in the oil and cloth market, the US's relative price for the oil and cloth would be:
10/12 = 0.83 Barrel of Oil per Yard of Cloth
---------------------------------------------------
12/10 = 1.2 Yards of Cloth per Barrel of Oil
the Mexico's relative price for the oil and cloth would be:
13/11 = 1.18 Barrel of Oil per Yard of Cloth
----------------------------------------------------
11/13 = 0.846 Yards of Cloth per Barrel of Oil
FORMULA
labour hours of
A
____________
labour hours of
B
Relations in International Trade
Trading will benefit both
Countries.
Branches
If Country A has an Absolute Advantage in Product A and Country B has an Absolute Advantage in Product B, then TRADE is good.
Relations in International Trade
Suppose Country A has an
Absolute Advantage in making
everything. Does it still make
sense to Trade?
YES!
There will always be
a country that will produce
a certain good using lesser raw materials.
MORE EFFICIENT=CHEAPER
FIN
Adam Pascual
Full transcript