Liberty 303 Db 2

Definition of the key term: A country is said to have an absolute advantage over another country in the production of a good or service if it can produce that good or service (the “output”) using fewer real resources (like capital or labor, the “inputs”)." ( Van Marrewijk)

Summary: This article explains the theory of absolute advantage and shows how it can be applied to many aspects of economics. This theory is attributed to Adam Smith for his publication of An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed that mercantilism was not the right method and that free trade would be the most advantageous for all nations.

This article focuses on proving the ways absolute advantage effects countries, their international trade flow, and production decisions. It illustrates this by giving the example of two different countries: The United States and Japan- two countries producing food and cars, using labor as the only input. The two countries are also equal in their workers productivity. The United states produces food more efficiently, giving them the absolute advantage in this area. Japan produces cars more efficiently, giving them the absolute advantage in this area. This article shows how absolute advantage can be a good thing. The countries have “potential for gains from specialization if both countries concentrate in the production of the good they produce most efficiently. In principle, both countries can gain: for example, if they exchange three units of food for one car.” (Van Marrewijk) This is called interindustry trade, exchanging one kind of good for another.

There are, however, disadvantages in this theory. In the fore mentioned example, one country has an advantage in production over another country. However, many times, a country is not able to gain an advantage in producing any specific product because they do not have the technology that they need. Thus, they are unable to compete and benefit from free trade. David...