Absolute Advantage

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  • A theory of international trade originally put forward by Adam Smith (1723–1790). This theory is largely based on resource endowment and acquisition of skills for efficient production. Although endowment is a gift of nature, special skills and techniques are required for production of goods. The theory postulates that efficient trade depends on specialization on the production of goods for which a nation is well-endowed and efficient. Production of those goods reflects a nation's absolute advantage. A nation must then produce and export the goods of its absolute advantage and import the goods of its absolute disadvantage. A corollary of the theory of absolute advantage is the labor theory of value, which assumes that the cost (not the opportunity cost), and therefore the price of ...

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