![]() The gain from trade for country A is +20 units of X and -10 units of Y so that net gain to it from trade is +10 units of X. The gain is production of X and Y commodity each is of 10 units. After trade it specialises in Y and produces 40 units of Y and no unit of X. Country B produces 10 units of X and 20 units of Y before trade. After trade, as it specialises in the production of X commodity, the total output of 40 units of X is turned out by A and it produces no unit of Y. The gains from trade for the two trading countries can be shown through Table 2.2.īefore trade, Country A produces 20 units of X and 10 units of Y. Since slope of AA 1 is less than the slope of BB 1, it signifies that country A has absolute cost advantage in the production of X commodity, while country B has the absolute cost advantage in the production of Y commodity.Īdam Smith also emphasised that specialisation on the basis of absolute cost advantage would lead to maximisation of world production. The slope of production possibility curve is measured by the ratio of labour productivity in X to labour productivity in Y in each country. Alternatively, if all the resources are used in the production of Y, it is possible to produce OB quantity of Y. In case of this country, if all resources are employed in the production of X commodity, OB 1 quantity can be produced. BB 1 is the production possibility curve of country B. On the contrary, if all resources are used in the production of Y, country A can produce OA quantity of Y. ![]() Given the techniques and factor endowments, if all the resources are employed in the production of X commodity, it can produce OA 1 quantity of X. 2.1, AA 1 is the production possibility curve of country A. It is possible to explain the cost difference in two countries A and B concerning the commodities X and Y geometrically through Fig. The absolute cost advantage of country A in the production of X and that of B in the production of Y can also be expressed as below: If country A specialises in the production and export of commodity X and country B specialises in the production and export of commodity Y. At the same time, the country B may be willing to give up 2 units of Y to have I unit of X. Country A may be willing to give up 1 unit of X for having 0.5 unit of Y. It signifies that country A has an absolute advantage in producing X while country B enjoys absolute advantage in producing commodity Y. ![]() I man-day of labour can produce 10 units of X but 20 units of Y. In country A, I man-day of labour can produce 20 units of X but 10 units of Y. If each country has at its disposal 2 man-days and 1 man-day is devoted to the production of each of the two commodities, the respective production in two countries can be shown through the hypothetical Table 2.1. The cost of producing these commodities is measured in terms of labour involved in their production. ![]() Suppose there are two countries A and B and they produce two commodities X and Y. When countries specialise on the basis of absolute advantage in costs, they stand to gain through international trade, just as a tailor does not make his own shoes and shoemaker does not stitch his own suit and both gain by exchanging shoes and suits. As long as one country has those advantages, and the other wants them, it will always be more advantageous for the latter, rather to buy of the former than to make.” In this context, Adam Smith writes “Whether the advantage which one country has over another, be natural or acquired is in this respect of no consequence. The free and unfettered international trade can make the countries specialise in the production and exchange of such commodities in case of which they command some absolute advantage, when compared with the other countries. Undoubtedly, the slogans of self- reliance and protectionism have been raised from time to time, but the self-reliance has eluded all the countries even up to the recent times. The free trade, according to Smith, promotes international division of labour.Įvery country tends to specialize in the production of that commodity which it can produce most cheaply. He upheld in this theory the necessity of free trade as the only sound guarantee for progressive expansion of trade and increased prosperity of nations. Adam Smith’s theory of absolute cost advantage in international trade was evolved as a strong reaction of the restrictive and protectionist mercantilist views on international trade. ![]()
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