The Absolute Advantages Theory: the Essence, Positive and Negative Features

Development of international trade during the transition period of the developed countries to a large machine production led to the emergence of the absolute advantage theory, developed by A. Smith. In his work "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), he criticized mercantilism. A. Smith hold the view that the wealth of nations depends not so much on the accumulated stock of precious metals, but on the possibility of economy to produce final goods and services. Therefore, the main task of the country is not the accumulation of gold and silver, but making arrangements to develop production on the basis of cooperation and division of labor. A. Smith was the first one, who answered the question "Why is a country interested in international exchange?" He believed that when two countries are trade partners, they need to benefit from trade. When one of them does not win anything, it will abandon the trade. A state can benefit not only from selling, but also from purchasing goods at the foreign market. And A. Smith made an attempt to determine what products are profitable to export and import, and how benefits from trade appear.

The theory of international trade by A. Smith is based on the following preconditions:

• labor is the only factor of production. It only affects the productivity and price of goods;

• full employment, i.e. all available labor forces are used in the production of goods;

• international trade involves only two countries, which trade only by two products between each other;

• production costs are constant, and its reduction increases the demand of goods;

• the price of one product is expressed in amount of labor spent on production of another product;

• transport costs of goods from one country to another are not taken into account;

• foreign trade is carried out without any restrictions;

• international trade is balanced (import is paid by export);

• factors of production are not moved between countries.

This theory became known as the absolute advantage theory, because it was based on the absolute advantage: a country exports the goods, which costs of production are lower than in a partner country, and imports the goods, produced abroad with lower costs. Both countries benefit from the specialization of each of them in the production of the goods they have absolute advantage in. This gives an opportunity to use the resources most effectively, resulting in the increasing of production of both goods. Increase of production of both goods represents the gain from specialization in production, which is divided between two countries in the process of international trade.

The main conclusion of the theory of absolute advantage is that every country benefits from international trade and it is decisive for forming the external sector of economy. International trade is not a zero-sum game, but a game with a positive result, i.e. division of labor is beneficial at both the national and international levels. However, nowadays, by using the principle of absolute advantage, only a small portion of international trade can be explained (for example, some part of trade between the developed countries and developing ones). The overwhelming part of international trade, especially between the developed countries, is not explained by this theory, because it does not consider the situation when one of the trading countries has no absolute advantage in any commodity. This position was explained by D. Ricardo in the comparative advantage theory.

< Prev   CONTENTS   Next >