Answers:
Adam Smith’s theory of absolute advantage
Economist, Adam Smith, disagreed with the version of mercantilism. Adam Smith said that different countries produce different goods efficiently. Like England due to its efficient manufacturing processes, was the world’s most efficient textile manufacturer.
France has an efficient wine industry due to a combination of factors like favourable climate, good soil and accumulated expertise.
In the ‘theory of absolute advantage’ Adam Smith’s view is that a country should never produce goods at home which can be bought from other countries at a lower cost. Each country should specialise in the production of goods in which it has an absolute advantage. In this way, both the countries can benefit by engaging in trade. Availability of resources, accumulated expertise and consequent productivity confers absolute advantage to a particular country. Here, it is pertinent to quote the examples of Ghana for Cocoa, Bangladesh for jute, few south east nations for rice, in addition to England and France.
As a result of specialisation and trade, output of commodities would increase and consumers in countries participating in trade would be able to consume more. This signifies that trade is a positive-sum game as it produces net gains for all.
David Ricardo’s theory of comparative advantage
Economist David Ricardo in his ‘theory of comparative advantage’ discovered further the Adam Smith’s theory of absolute advantage. He visualised a situation as to what might happen, when one country has an absolute advantage, in the production of all goods. If Adam Smith’s theory is applied, a country having absolute advantage in the production of all the goods may not derive any advantage when it involves in international trade.
Without trade a country has to consume whatever it produces. By engaging in trade, the production can be increased in countries and more goods can be consumed by consumers in various countries. David Ricardo advocates that more goods can be consumed by consumers in all nations, if there are no restrictions on trade. This happens even in countries lacking an absolute advantage in the production of any good.
The theory of comparative advantage provided a strong base for encouraging international trade and promoting free trade. Those advocating free trade use the views of David Ricardo as a tool to argue that all countries engaging international trade will gain.