Absolute Advantage:

The theory of absolute advantage, propounded by Adam Smith, is based on the assumption that a country can be absolutely better or more efficient at production of certain goods than its trading partners. Adam Smith, in The Wealth of Nations, had stated that under free trade, each country should specialize in producing those goods that it could produce most efficiently. Some of these would be exported to pay for the imports of goods that could be produced more efficiently elsewhere. The theory of absolute advantage states that trade occurs when one country, individual, company, or region is absolutely more productive than another entity in the production of a good. A country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another country producing that good or service. The principal of absolute advantage says that a country can produce more of any given goods at a lower cost of production than another economic unit. It is a relative term and is calculated through comparisons with other economic units. The principal of absolute advantage is used to compare the productive efficiencies between different countries or economic units. A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. For example we can take the case of Country X, a country which has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. It can be seen that in terms of the production of goods, there are obvious gains from specialization and trade, if Country X produces copper and exports it to those countries that specialize in the production of other goods or services.