Absolute Advantage

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THEORY OF ABSOLUTE ADVANTAGE

The trade theory that first indicated important of specialization in production and division of labor is based on the idea of theory of absolute advantage which is developed first by adam smith in this famous book the wealth of nations publish in 1776.

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THEORY OF ABSOLUE ADVANATGE: ASSUMPTION

  1. Trade is between two countries.

  2. Only two commodities are traded.

  3. Free trade exists between the countries.

  4. The only element of cost of product is labor.

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Specialization

Labor leads to higher productivity and allows to achieve less labor cost per unit of output.

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Suitability

Skills of labor of the country in producing certain products.

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Economies of Scale

Helps to reduce the labor cost per unit of output.

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NATURAL ADVANATGE

  1. Natural resources

  2. Climatic Conditions

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AQUIRED ADVANTAGE

  1. Technology

  2. Skills