Economic gains from absolute cost
advantage trade theory of Adam Smith
The
trade or economic gain from the absolute cost advantage theory of Adam Smith
can be discuss through the following way—
1.
Increase world’s total
production.
2.
Possibility of specialization.
3.
Increase consumption.
1. Increase world’s total production:
According
to Adam Smith’s absolute cost advantage trade theory, trade occurred between
countries that can bring gain for the countries. If there would be no trade then
the both countries had to produce the both products. Then according to above
mentioned table the total production would be produce X, 10+5 = 15 units
And Y, 5+10 = 15 units
= 30 units
That means the total production would be 30
units of the two countries. But it there is trade between these two countries
then country A only produce product X and country B produce only product Y. And
when country A will produce only product X then its production will be 20 units
and production of country B will be 20 units of product Y. Thus total
production will be 20+20=40 units. Before trade total production was 30 units
and after trade it has been 40 units. So, it can be said that because of trade
according to absolute advantage theory world wide total production will be
increased.
2. Possibility of specialization:
According
to Adam Smith absolute specialization is possible through trade. Because when a
country become specialized in producing a special product it can make sure the
proper utilization of resources.
3. Increase consumption:
Through
specialization more production is possible. Then it is also possible to export
the surplus product to another country. And the opposite country can get the
opportunity to consume the products by import. And in result it increase the
consumption and the society can be benefited from it.
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