Theory of Absolute Advantage and Its Limitations

According to the theory of absolute advantage international trade takes place because one country can produce the good more efficiently than the other and hence it provides the incentive for the country which is producing the good efficiently to export it to another country. For example suppose country A can make 100 computers with 10 workers but it takes 20 workers for making 100 television and country B can produce 100 computers with 20 workers but can produce 100 television with 10 workers then country A has absolute advantage over country B when it comes to make computers and country B has absolute advantage over country A when it comes to make television. Hence country A will produce and export computer to country B and take advantage of specialization and country B will make television and export it to country A. Hence it will benefit both the countries.

However there are certain limitations of this theory

1. It does not take into account transportation costs involved in selling the product in international market.

2. It is based on the assumption that exchange rates are stable which is seldom the case and hence a limitation.

3. It also assumes that labor can switch between products easily and they will work with same efficiency which in reality cannot happen.

1 comment… add one
  • Naveed

    Sir your contribution in discussing introduction and limitation of absolute advantage theory are really meaningful and grateful.Bundle of Thanks.

    From
    Naveed Ahmad (Pakistan)

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