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Absolute Advantage Theory

The criticism of the mercantilism led to the birth of the absolute advantage theory. Economist claimed that with the mercantilism school of thought, countries would never perpetually increase their wealth through international trade but rather they will revolve around being bullion deficits and bullion surpluses. Adam Smith came up with a solution to this hitch in the international trade; the absolute advantage theory. This theory’s major implication is that it encourages wealth creation in foreign markets. When countries can easily import goods that they do not produce efficiently and produce only those they are great at, more wealth will be created since they are not limited by  what they can produce hence allowing an opportunity for growth. Moreover, the absence of trade barriers allows increased specialization, mutual benefits from countries and increase in the market size which all translate to wealth creation.

However, even though this theory succeeded in fostering wealth creation and expansion of international trade, Smith’s theory of absolute advantage has been criticized as ignoring some aspects of international trade. First, the theory does not explain how a country that has no absolute advantage in production of any good will benefit from the free trade or even join the trade which will boil  down to it not able to pay for the imports. Moreover, if a country has absolute advantage in production of all goods, the theory will not be applicable. With the realization of the loopholes the absolute advantage theory had, Ricardo introduced the comparative advantage theory which would complement Smith’s theory.