Adam Smith's Theory Of Comparative Advantage

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Theory 1: Adam Smith (1776) Wealth of Nations Ricardo, David. On The Principles Of Political Economy And Taxation. London: John Murray, 1821. (Shouldn’t use book maybe just name and year) Opposite of comparative advantage is Absolute Advantage, producing all own products at lowest cost. Comparative advantage is the theory that free trade between two or more countries will increase consumption and is of mutual benefit to both countries. Each country should export a good for which it has a comparative advantage over and export surplus production in exchange for goods produced in another country which has a comparative advantage for the good. This is under the assumption that there is differences in labour productivity in both countries. According to Comparative advantage even a country with a comparative disadvantage will gain from specialising in most efficient goods. According to Adam Smith (1776) Wealth of Nations, absolute advantage is the ability of a country to produce more than other countries but with less resources. However the theory of comparative advantage holds that a country with an absolute advantage can still gain from specialisation in their most efficient goods. Building on from Ricardo’s theory of comparative advantage, two men; Eli Heckscher, and Bertil Ohlin developed a mathematical model that used a country’s factor endowments as a basis for prediction of production and commerce patterns. This model presented the idea that a country a country abundant

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