UGC NET COMMERCE January 2017(Paper-II) Q46
- Option : C
- Explanation : Theory of Absolute Cost Advantage : Adam
Smith was one of the forerunners of the
classical school of thought. He propounded a
theory of international trade in 1776, which is
known as the theory of absolute cost
advantage. He was of the opinion that
productive efficiency differed among different
countries because of diversity in the natural
and acquired resources possessed by them.
The differences in natural advantage manifests
in varying climate, quality of land, availability
of minerals, water, and other natural resources;
while the difference in acquired resources
manifests in different levels of technology
and skills available. A particular country
should specialise in producing only those
goods that it is able to produce with greater
efficiency, that is at lower cost; and exchange
those goods with other goods of their
requirements from a country that produces
those other goods with greater efficiency or at
lower cost. This will lead to optimal utilisation
of resources in both the countries. Both
countries will gain from trade insofar as both
of them will get the two sets of goods at the
least cost.
Adam Smith explains the concept of absolute advantage in a two commodity, two country framework.
