The theory of absolute advantages of Smith

The founder of the classical economic school was Adam Smith. He critically opposed the mercantilists, who argued that the wealth of the state directly depends on the availability of treasures in the form of jewelry and gold, coming from the excess of exports over imports.

Smith proclaimed, as the chief wealth of nations and nations, the international division of labor and the corresponding specialization of different countries for the production of those products for which they have absolute advantages.

This model of international trade is most easily achieved in economically free conditions, in which producers will have the opportunity to choose independently their own activities within the framework of the current legislation. This policy, proposed by Smith, provided for the government's non-interference in the economy and freedom of competition. Thanks to this direction, the resources of each state should move to profitable sectors because countries can not compete with each other in non-profitable sectors.

To establish the type of product on which to specialize the state, Smith suggested taking into account the law of comparative advantages - natural and acquired.

The first can include climatic features or the possession of certain natural resources. So, for example, in accordance with the climate, you can determine the type of agricultural products, the release of which will be most beneficial to the state. The presence of reserves of oil, ore and other raw materials will determine the specifics of industrial production.

The state can benefit from the high qualification level of the labor force and developed production technology. Technological advantages are connected with ability first of all to make difficult and various production with the least expenses and more effectively to produce homogeneous goods.

Differences between the acquired and natural advantages of different states, as a rule, have a very stable and long-term character. Mainly, this is due to the reduced mobility of production factors. In this regard, the costs in different states for manufacturing will also be different. As a result of the difference in income, the basis for mutually beneficial trade is formed.

The theory of absolute advantages provides for the refusal to manufacture unprofitable products. The concentration of resources on the production of products that bring benefits, contributes to an increase in output. As a result, the exchange between states increases.

Thus, the theory of absolute advantages consists in the fact that countries export only those products that they produce with the least cost. At the same time, only those goods are imported that other countries produce at the lowest cost.

The theory of absolute advantages includes several provisions.

First of all, labor is the only production factor. The theory of absolute advantages provides for full employment. In other words, all labor resources are used in the production of products . According to Smith, the world economy included two countries. Trade occurs between them with only two goods. Production is associated with costs, the decrease of which increases the demand for products. The cost of one product is expressed in the amount of labor that was spent on making it another. Foreign trade is carried out without regulations and restrictions.