Absolute advantage

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The theory of absolute advantages is an explanation of international trade proposed by Adam Smith in 1776 in his Wealth of Nations. A country has an absolute advantage over another if it needs fewer resources to produce a good.

According to Smith, if a country has an absolute advantage over its partner, while its partner has another absolute advantage over it, then both of them would benefit from international trade by specialising themselves in the production of the good for which they are respectively more competitive.

This theory suggests that a country which has no absolute advantage cannot benefit from trade. Indeed, since all its partners produce all goods more efficiently, such a country would have nothing to sell. David Ricardo solves this problem in 1817 (Principles of political economy and taxation). Mutually beneficial exchanges only require comparative advantages.

The theory of Ricardo is that each country should specialise in the production for which it has a lower opportunity cost (i.e. the potential production of goods B that must be given up to produce one more unit of good A) than its partner. It is highly improbable that a country has no comparative advantages over another.