2.2. The theory of absolute advantage 2.2.1 Adam Smith,(1723-1790) a classical economist, was leading advocate of free trade(Laissez-Faire) Inquiry into the Nature and causes of the Wealth of Nations”1776 The wealth of nations 2.2.2 The main view on trade Trade is based on absolute advantage and benefits both nations. When each nation specializes in the production of the commodity of its absolute advantage and exchanges part of its output for the commodity of its absolute disadvantage, both nations end up consuming more of both commodities
2.2. The theory of absolute advantage 2.2.1 Adam Smith, (1723 – 1790) a classical economist, was leading advocate of free trade (Laissez-Faire) “Inquiry into the Nature and causes of the Wealth of Nations” 1776 ---- The wealth of Nations 2.2.2 The main view on trade Trade is based on absolute advantage and benefits both nations. When each nation specializes in the production of the commodity of its absolute advantage and exchanges part of its output for the commodity of its absolute disadvantage, both nations end up consuming more of both commodities
2.2.3 stration of absolute advantage Before Specialization in production X product Y product output Labor time output Labor time A country B country 3 2 5 Labor time 7X+3Y After Specialization in production X product Y product output Labor time output Labor time A country8 2 0 B country 0 3 5 Labor time ------8X+6Y >7X+ 3Y
2.2.3 Illustration of absolute advantage Before Specialization in production X product Y product output Labor time output Labor time A country 4 1 1 1 B country 3 2 2 1 5 Labor time ----- 7X + 3Y After Specialization in production X product Y product output Labor time output Labor time A country 8 2 0 o B country 0 0 6 3 5 Labor time ------ 8X + 6Y > 7X + 3Y
But if one nation has absolute advantage for both commodities how to do? X product Y product output Labor output Labor time time count B 3 countr
But if one nation has absolute advantage for both commodities,how to do? X product Y product output Labor time output Labor time A country 4 1 3 1 B country 3 2 2 1
2.3 The theory of comparative advantage 2.3.1 Economists David ricardo (1772-1823) He was born in 1772 and was the third of 17 children. his parents were very successful and his father was a wealthy merchant banker. They lived at first in the Netherlands and then moved to london david himself had little formal education and went to work for his father at the age of 14. However, when, at the age of 21, he married a Quaker(against his parents wishes) he was disinherited and so set up on his own as a stockbroker He was phenomenally successful at this and was able to retire at 42 and concentrate on his writings and politics He developed many important areas of economic theory much of the theory he developed is still used and taught today
2.3 The theory of comparative advantage 2.3.1 Economists - David Ricardo (1772-1823) He was born in 1772 and was the third of 17 children. His parents were very successful and his father was a wealthy merchant banker. They lived at first in the Netherlands and then moved to London. David himself had little formal education and went to work for his father at the age of 14. However, when, at the age of 21, he married a Quaker (against his parents wishes) he was disinherited and so set up on his own as a stockbroker. He was phenomenally successful at this and was able to retire at 42 and concentrate on his writings and politics. He developed many important areas of economic theory much of the theory he developed is still used and taught today
Principles of Political Economy and Taxation" 1817 2.3.2. The key views on trade (The law of comparative advantage) Even if a nation has an absolute cost disadvantage in the production of both goods, a basis for mutually beneficial trade may still exist The less efficient nation should specialize in the production and export of the commodity in which it has a comparative advantage(where its absolute disadvantage is less) The more efficient nation should specialize in and export that commodity in which it is relatively more efficient(where its absolute advantage is greater)
Even if a nation has an absolute cost disadvantage in the production of both goods, a basis for mutually beneficial trade may still exist. 2.3.2. The key views on trade (The law of comparative advantage) The less efficient nation should specialize in the production and export of the commodity in which it has a comparative advantage (where its absolute disadvantage is less) The more efficient nation should specialize in and export that commodity in which it is relatively more efficient (where its absolute advantage is greater). “Principles of Political Economy and Taxation” 1817