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Absolute and comparative advantages (Smith and Ricardo theories)

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1-Describe Adam Smith’s concept of absolute advantage and David Ricardo’s concept of Comparative Advantages. Are those concepts still useful in the 21st century’s Business environment?

The concept of absolute advantage is the ability of a country to use less resources (inputs) to produce goods/products than any other country. For Smith, a country should specialize in the production of the product for which it has an absolute advantage and should buy at lower price others goods from other countries.

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Smith argued in favor of globalization because if boarders are open, countries will specialize in the output for which they have an absolute advantage in order to exchange it between each other. And so, the global production will increase.

The concept of comparative advantages argues that even if a country doesn’t have an absolute advantage, it should trade and specialize in the production of a product for which it has a comparative advantage, which means a lower relative price.

So even without an absolute advantage, a country should specialize in goods which have comparative advantages and exchange, it will increase the global production, without any additional resources.

By the 21st century, even if the concept of absolute advantage seems out of date, it is always valid, because we still use it. If a country has an absolute advantage on a product it will definitely concentrate on it and produce it competitively in order to export the most it can. But this theory suggests that every country has an absolute advantage and unfortunately it is not true. So, if a country has no absolute advantage, does it mean that it can’t participate in global trade? That is one of the reason that leads Ricardo to write his concept of comparative advantages. He argues that even if a country doesn’t have any absolute advantage, it can always focus on the production of the product which has a lower relative price, compare to the other country, and it will make profits, in theory. Of course, nowadays we know that this concept doesn’t take into account some elements such as economy of scale, neither national factor endowments (theory developing by Heckscher and Ohlin) but countries still use it by the 21st century. To conclude, those concepts both demonstrate that international trade is not a
“zero-sum game” but a “positive-sum game”. Every countries should exchange, open boarders and avoid autarchy. There is something natural in international trade, because it’s impossible to produce everything or at least competitively. The main useful idea of these two international trade theories is : there is benefits from international trade.

Cite this Absolute and comparative advantages (Smith and Ricardo theories)

Absolute and comparative advantages (Smith and Ricardo theories). (2016, Nov 07). Retrieved from https://graduateway.com/absolute-and-comparative-advantages-smith-and-ricardo-theories/

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