Absolute Cost Advantage Trade Theory of Adam Smith:

Absolute Cost Advantage Trade Theory of Adam Smith.

            According to Adam Smith a country may have full facilities to produce some specific products than other countries. Which country have the full facilities to produce a specific product the country specialize the production of that product. And avoid the production of the products for what the country have not full facilities. Finally it will import the non-produced products from another country.

Applications:

1.      Two countries.

2.      Two products.

3.      Unit of production (Resource).

4.      Avoiding transportation cost.

Source of Trade:

[Production unit of seven (7) days based on resources]

Country	Product X  (unit)	Product Y (unit)	Domestic Production ratio
A	10	5	10:5=2:1
B	5	10	5:10=1:2

From the above table it is noticed that country A  can produce 10 unit X products or 5 unit Y products by a fixed labour power or resources. On the other hand country B can produce 5 unit X product or 10 unit Y product by a fixed labour power or resource. It can be said that country A has full facilities to produce product X than country B. And country B has definitely full facilities to produce product Y than country A.

            Now, for country A, 10 X > 5Y

            And for country B, 10Y > 5X

As a result according to absolute cost advantage theory there will be a trade relationship between these two countries. Country A will produce and export product X and import product Y. on the other hand country B will do the opposite that means it will produce and export product Y and import product X. Thus trade relation is built between two countries. There may be difference among absolute advantage of different countries. That result in trade. The aim of trade is to gain mutual advantage.