⚖️ Absolute Advantage vs Comparative Advantage Theory
📚 Classical Assumptions Behind Trade Theories
Both Adam Smith’s Theory of Absolute Advantage and David Ricardo’s Theory of Comparative Advantage are based on classical assumptions to simplify the model of international trade.
⚙️ Relevant Classical Assumptions:
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🌍 Only two countries and two goods are involved.
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👷♂️ Labour is the only factor of production.
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🎯 Countries aim to maximize output and consumption.
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🚫 No transportation costs or barriers to trade.
📊 Comparison Between Absolute and Comparative Advantage
| 🧩 Aspect | ⚖️ Absolute Advantage | 🔄 Comparative Advantage |
|---|---|---|
| Definition | A country can produce more of a good with the same resources. | A country has a lower opportunity cost in producing a good. |
| Focus | Efficiency in production of goods. | Opportunity cost and relative efficiency. |
| Key Factor | Total output or productivity. | Opportunity cost of producing one good over another. |
| Application in Trade | Countries should trade based on who is most efficient in producing a good. | Countries should specialize in producing goods where they have the lowest opportunity cost. |
| Real-World Relevance | Works well when one country is clearly more efficient in producing all goods. | Provides a broader explanation of trade even when one country has an advantage in all goods. |