What is Absolute Advantage Theory ? | Ecoholics

In today's video, we will discuss the absolute advantage theory which was given by Adam Smith in 1776. This theory was developed to explain how countries can gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other countries. Countries with an absolute advantage can decide to specialize in producing and selling a specific good or service and use the generated funds to purchase goods and services from other countries.
KEY TAKEAWAYS
-Absolute advantage is when a producer can provide a good or service in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors.
-A concept developed by Adam Smith, absolute advantage can be the basis for large gains from trade between producers of different goods with different absolute advantages.
-By specialization, division of labor, and trade, producers with different absolute advantages can always gain more than producing and consuming in isolation.
-Absolute advantage can be contrasted with comparative advantage, which is the ability to produce goods and services at a lower opportunity cost.

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