Jahangir Ali Nasir ID:6597 Absolute Advantage Theory
The theory that trade occurs when one country, individual, company, or region is absolutely more productive than another entity in the production of a good. A person, company or country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another entity producing that good or service. The theory of absolute advantage is also called the classical theory of trade. Example 1: Australia is the world's most efficient producer of wool. It should trade with Japan , which is the world's most efficient producer of motor cars. This concept of absolute advantage means that a nation would produce only those goods that made the best use of its natural and acquired resources and its climatic advantages. Put more succinctly, absolute advantage is the capability of one nation to produce more of a particular product than another country with the same amount of input. Example 2: Russia has an absolute advantage in both the production of oil and coal. In no way can Canada produce more coal or oil than Russia. That is to say Russia's production possibility curve is to the right of Canada's.
The theory of comparative advantage states that a country should specialize in the production of good or service in which it has lower
output would be as follows:
Northland: 100 tones Southland: 200 tones
If all the resources of the countries were allocated to the production of clothes. Example Suppose for example we have Both two produce countries and of equal two
size. but are immobile between the countries. The productive capacities and efficiencies of the countries are such that if both countries devoted all their resources to Food production. Food and Clothes.opportunity cost and it should import commodities which have a higher opportunity cost of production. output would be:
Northland: 100 tones Southland: 100 tones
Assuming each has constant opportunity costs of production between the two products and both economies have full employment at all times. Northland and Southland. The price mechanism must be working to provide perfect competition
. All factors of production are mobile within the countries between clothing and food industries.