Key Term (100 words minimum)
The key term is Absolute Advantage Theory. Introduced by economist Adam Smith in 1776, this theory assumes that a country cannot only produce goods, which it has an absolute advantage in. a country that produces goods at the lowest possible cost is said to hold an absolute advantage over the others (Blecker, 1997). Moreover, it implies that the given country will need fewer resources to produce the same volume of goods compared to other countries. The production efficiency results in an absolute advantage, which is a core ingredient for beneficial trade (Brandis, 1968). I am interested in this theory because it argues that it is impossible to move factors of production from one country to another. Therefore, this is the only theory that can help me understand the nature and causes of wealth of different countries.
Explanation of the Key Term (100 words minimum)
Absolute advantage is defined as the ability of a producer to produce more goods or services, efficiently than other producers, at the lowest possible costs (Lutz, 2008). This means that a producer with an absolute advantage can produce goods with lower marginal expenses such as cheaper workers, cheaper materials, less time and fewer materials. Though absolute advantage is related to comparative advantage, the two concepts differ greatly. Comparative advantage means that a country has an ability to produce particular commodities at the lowest possible opportunity cost (Lutz, 2008). A producer with an absolute advantage can decide to sell its commodities at cheaper price than other producers without an absolute advantage.
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Essentials relevant to understanding this key term (100 words minimum)
The essentials relevant to understanding this term include goods, production, division of labor, trade and comparative advantage. For a country to have an absolute advantage, it must be able to produce some good or service, in greater quantity and at a lower cost compared to other competitors (Lutz, 2008). Through division of labor, trade and specialization, countries with different absolute advantages can enjoy the benefit of over reproduction in isolation (Leszek Jasiński, 2017). Absolute advantage is directly linked to the concept of comparative advantage. Goods, production, division of labor, trade and comparative advantage are key to understanding the idea of absolute advantage. In production of goods, absolute advantage determines a country’s extent of division of labor. On the other hand, in producing the final goods, comparative advantage and division of labor results in gains from trade. Compared to small countries, larger countries tend to export a smaller percentage of their final commodities and a bigger percentage of their intermediate commodities (Weder, 1995).
Major Article Summary (300 words minimum)
The major article is, Absolute Advantage and International Trade : Evidence from Four Euro-zone Economies by Stergios A. Seretis and Persefoni V. Tsaliki . This article is an empirical study to the international trade approach based on the theory of absolute advantage. the article argues that the differences in productivity cause transfer of value towards countries with absolute advantage in production of goods. The approach used in this article is based on the Marxian/classical theories of competition and value and the researchers have operationalized it using the input/output data for the years 1995, 2000 and 2005 focusing on four euro-zone states. These are Netherlands, Finland, Spain and Greece.
The argument put forth in this article is that an economy would benefit if it exports the goods that produce more efficiently and imports the goods that are produced efficiently overseas (Blecker, 1997). The underlying idea is that the free operation of markets leads in the long run, to a trade balance. An alternative argument presented in this article is about the principle of comparative advantage. The core argument about absolute advantage is that any country that has advantage in factors of production at the onset of the international trade transactions will maintain them as other countries struggle to prevail in the market. Some of the fundamental principles of the free trade theory are questioned while at the same time, the basics for an alternative approach to international trade are recommended. The article aims to showcase that the differences in production capacity exists between nations and may give rise to transfer of value in the direction of countries that have an absolute advantage in productivity over others.
The authors conclude that over the years, these countries have experienced persistent productivity differences. In simple words, this means that absolute advantage in production cannot be changed into comparative advantage.
References
Blecker, R. A. (August 01, 1997). The 'Unnatural and Retrograde Order': Adam Smith's Theories of Trade and Development Reconsidered. Economica, 64, 255, 527-537.
Brandis, R. (June 01, 1968). The Myth of Absolute Advantage: Reply. The American Economic Review, 58, 3, 520-522.
Lutz, M. (January 01, 2008). Revisiting the Relevance of International Trade Theory. Forum for Social Economics, 37, 2, 147-164.
Leszek Jasiński. (January 01, 2017). The Generalization of the Comparative Advantage Theory. Journal of Vasyl Stefanyk Precarpathian National University, 4, 21-33.
Weder, R. (October 01, 1995). Linking Absolute and Comparative Advantage to Intra-Industry Trade Theory. Review of International Economics, 3, 3, 342-354.
