The Theory Behind Absolute Advantage - 1141 Words

Over many years there has been many conceptual theories devised to help explain the reasons why there is trade within the world accompanied by the possibilities that gains could or could not be made. This piece of work will examine four main theories put forward by Adam Smith (Absolute advantage, 1776) which was then expanded on by David Ricardo with his theory of the Ricardian Model (Comparative advantage, 1817). Also including the Heckscher-Ohlin model (relative factor abundance, 1919, 1933) and the ideas of New Trade Theory (Economies of Scale and Imperfect Competition). These ideas will be evaluated and synthesised to see if these explanations truly explain the reasons of trade theory. Absolute advantage was an idea suggest by Adam Smith in 1817. The theory behind absolute advantage suggests that if a country is highly skilled and efficient in producing a certain good with the fewer resources, then it is believed that a specific country has an absolute advantage in the production of that good (SlomanGarratt, 2013). However Absolute advantage can only occur if the country using its resources for a specific good/service does so efficiently otherwise no gains are made from trading. Although it can be argued that the idea of Absolute advantage does not particularly make much sense in explaining trade patterns. As said in Feenstra’s and Taylors book, Absolute advantage does not particularly help to explain the case of why the US imports snowboards from places like ChinaShow MoreRelatedDifference Between Absolute and Comparative Advatage621 Words   |  3 PagesThe theory of comparative advantage is perhaps one of the most important concepts in international trad e theory. 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