What Is Absolute Advantage Theory?

Absolute advantage theory is also called "absolute cost theory" and "absolute benefit theory". International trade theory on absolute cost advantage. Proposed by British classical economist Adam Smith in his book "The Study of the Nature and Causes of National Wealth" in 1776. I believe that the reason for international trade is the difference in absolute costs between countries. If a country's cost of producing a certain commodity is definitely lower than that of another country, that country has the absolute advantage of the product and can be exported; otherwise Then imported. All countries should form an international division of labor in accordance with their absolute advantages and provide exchange products. This theory explains some of the reasons for international trade, but it cannot explain the trade between countries that have absolute advantages in the production of various products and countries that do not. ^[1]

Absolute advantage theory

Absolute advantage theory is also called "absolute cost theory" and "absolute benefit theory". International trade theory on absolute cost advantage. Proposed by British classical economist Adam Smith in his book "The Study of the Nature and Causes of National Wealth" in 1776. I believe that the reason for international trade is the difference in absolute costs between countries. If a country's cost of producing a certain commodity is definitely lower than that of another country, that country has the absolute advantage of the product and can be exported; otherwise Then imported. All countries should form an international division of labor in accordance with their absolute advantages and provide exchange products. This theory explains some of the reasons for international trade, but it cannot explain the trade between countries that have absolute advantages in the production of various products and countries that do not. ^[1]

So-called

Absolute cost theory, comparative cost theory and factor endowment theory

(1) Adam Smith is the founder of the theory of international division of labor and international trade. In his representative work, The Wealth of Nations, he proposed the theory of international division of labor and free trade. In discussing his theory, Smith first analyzed the benefits of division of labor. In his view, the principle of division of labor between different occupations and different types of work within a country also applies to countries. He believes that each country has its own absolutely favorable production conditions suitable for the production of certain specific products. Specialized production, and then exchanges with each other, is beneficial to all exchanged countries. This is the "absolute interest theory" ". The doctrine of absolute cost is based on the principle of division of labor. For the first time in the history of human cognition, the principle of mutually beneficial trade has been demonstrated, which overcomes the one-sided view that mercantilists consider international trade to be unilaterally beneficial. This win-win idea of the division of labor and mutual benefit is not outdated in modern times, nor will it be outdated in the future. In a sense, this win-win concept is still the guiding ideology of contemporary countries to expand opening up and actively participate in international division of labor and trade.

(2) The comparative cost theory is the inheritance and development of the absolute cost theory, which further perfected the international trade theory of the classical school. It was founded by David Ricardo, another famous representative of the British classical economics. The comparative cost theory holds that the basis of international trade is not limited to the absolute difference in production technology. As long as there is a relative difference in production technology between countries, there will be a relative difference in production costs and product prices. The product has comparative advantages, which makes it possible for international division of labor and international trade to obtain comparative benefits. In short, the theory of comparative interests and further analysis reveal the mutual benefits of international trade and the necessity of international division of labor. It proves that by exporting products with lower relative costs, importing products with higher relative costs may achieve mutual benefit in trade. The core of Ricardo's comparative cost doctrine is the principle of comparative advantage. Comparative cost theory reveals the principle of human division of labor and cooperation. Since its establishment for more than 100 years, it has been regarded as a classic by the western international economics community and has become the main line of the development of the theory of international trade division of labor. Even in contemporary times, it is a logical starting point for studying international trade theory. The enlightenment of the comparative cost theory: "Countries should implement free trade policies to ensure the benefits of participating in international division of labor and trade." However, this theory only provides a basis for international division of labor and fails to reveal the main formation and development of international division of labor. International content of causes and law of values.

(3) Heckscher-Ohlin inherited and developed Ricardo's comparative cost theory, proposed the factor endowment theory, and explained the causes of international trade with the abundance and absence of production factors. Olin believes that the absolute difference in commodity prices is due to the absolute difference in costs, and the absolute difference in costs is due to: the different supply of the first factor of production, that is, the factor endowment of the two countries is different; second, the different products in the production process The proportion of features used is different (different levels of features). Since its creation, the theory of endowment of production factors has been questioned by scholars such as Leontief, but it is still regarded as a guide in contemporary international economic theory. Western economic circles believe that this theory constitutes a major challenge to the classical cost theory of Ricardo. Laid the cornerstone of modern international trade theory. Olin's theory helps us analyze, judge, and predict the trade patterns of countries in the world, and formulate corresponding countermeasures. In the risky international competition, we know ourselves and master the initiative. In addition, we should recognize that the production factors of a country are actually variables With the improvement of productivity, the development of science and technology and education, the quantity, quality and structure of production factors have changed accordingly. The contemporary technological revolution has changed the connotation of factors, promoted the integration of intangible and tangible elements such as human capital, technological innovation information capital, and gave production factors a new connotation. Therefore, we cannot treat the comparative advantage in factor endowment unilaterally and staticly. This is the scientific attitude that we should take from borrowing from Olin theory.