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ADVANTAGE
BY AMIT MADKAR RAVI SHARMA ANKIT DALVI MAYUR BOKDE RAHUL RAJE
Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nations import Instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.
The ability of a country, individual, company or region to produce a good or at a lower cost per unit than the cost at which any other entity produces that good or service Export those goods and services for which a country is more productive than other countries Import those goods and services for which other countries are more productive than it is
Australia has more agricultural land but less labor, and capital, and mines than Great Britain; consequently, Australia is better adapted to the production of goods that require great quantities of agricultural land, whereas Great Britain has an advantage in the production of goods requiring considerable quantities of other factors
A country enjoys an absolute advantage over another country in the production of a product if it uses fewer resources to produce that product than the other country does. A country enjoys a comparative advantage in the production of a good if that good can be produced at a lower cost in terms of other goods.
Wheat Cotton
6 MT 2 MT
2 MT 6 MT
In this example, India can produce three times the wheat that Bangladesh can on one acre of land, and Bangladesh can produce three times the cotton. We say that both the countries have mutual absolute advantage.
Wheat Cotton
CONSUMPTION
India
300 MT
Bangladesh
300 MT
Wheat
Cotton
300 MT
300 MT
PRODUCTION POSSIBILITY FRONTIERS (PPF) FOR BANGLADESH AND INDIA BEFORE TRADE
Bangladesh
India
Because both countries have an absolute advantage in the production of one product, specialization and trade will benefit both.
Rice is produced in both Vietnam and Japan Assume demand conditions are exactly the same in both countries Implies demand curves for rice in the two countries are exactly the same Trade often arises due to differences in supply conditions Assume supply curve for Vietnam is farther to the right than supply curve for Japan At every price Vietnam supplies more rice than Japan Perhaps Vietnam uses superior or production inputs are lower in Vietnam technology
Conclusion
Differences in supply conditions among countries rise to complementary patterns of absolute advantage These patterns of absolute advantage make possible complementary patterns of international trade Absolute advantage leads to productivity gain, absolute cost gain and vent for surplus gain