The theory of absolute advantages of A. Smith and...

The theory of absolute advantages of A. Smith and the theory of comparative advantages of D. Ricardo

Adam Smith's theory of absolute advantages is to determine the specialization of countries based on absolute advantages in the production of a certain product. According to A. Smith's conclusion, "... if any foreign country can supply us with any goods at a cheaper price than we ourselves are able to produce them, it is much better to buy them from her for some of the product of our own industrial labor, applied in the area in which we have some advantage. "

Absolute benefits ( absolute advantage ) can be characterized in two ways:

or cheaper production of a unit of a given product in a given country compared to other countries (the time spent per unit of goods is compared);

or the higher productivity of creating a given product in a given country compared to another country (the production volume per unit of time is compared).

Thus, to determine the specialization based on the theory of absolute advantages, compare the production (either laboriousness or productivity) of the same product in one and the other country.

Example

Two countries A and C produce raw materials and equipment. The production capabilities of the two countries are determined by the following data.

Product

Country A

Country From

Raw materials, t/h

10

1

Equipment, pcs/h

1

6

If countries are closed, domestic consumption in each country will be determined by domestic production. For a country A in conditions of limited resources, the production capacity will be an alternative: 10 tons of raw materials or a unit of equipment per hour. For country C - 1 ton of raw materials or 6 units. equipment per hour. Country

A has absolute advantages in the production of raw materials, since in a unit of time it can produce it more than the country C. The country C, on the contrary, has absolute advantages in the production of equipment, as the production capabilities of this industry are higher here. It follows that it is advantageous for the country A to specialize in the production of raw materials, and C - in the production of equipment. However, since both countries need both products for domestic consumption, the consequence of international specialization will be the exchange and expansion, as a consequence, of the exchange of opportunities for domestic consumption. Country A can exchange 10 tons of raw materials for 6 units. equipment, increasing the possibility of internal consumption of equipment by 5 units, so in the absence of trade, only one unit of equipment could be produced. Country With can exchange 6 units. equipment for 10 tons of raw materials, expanding the internal consumption of raw materials by 9 tons (Figure 10.G).

Expanding consumption opportunities due to international trade (theory of absolute advantages)

Fig. 10.6. Expanding consumption opportunities due to international trade (theory of absolute advantages)

The country exports the goods in the production of which it specializes, and imports the goods in the production of which other countries specialize. At the same time, both countries are benefiting from international specialization. Its value for each country determines the difference between its trading capabilities (the quantity of goods that can be purchased in another country through international exchange) and production capabilities (the amount of goods that can be produced in a given country in conditions of limited resources).

Theory of comparative advantage ( comparative advantage ) David Ricardo justifies the benefits of foreign trade, even if the country does not have an absolute advantage in the production of a single commodity. It is sufficient that the ratio between the costs of production of a given product and other goods in a given country be lower than the similar ratio in another country. At the same time, relative prices or relative costs are measured, indicating how much of one product should be discarded in order to produce a unit of another.

If the country produces two goods X and Y, the relative price of the commodity X will be calculated by dividing the quantity of the commodity U on the quantity of the product X:

P x = Y/X. (10.4)

Thus, to determine the specialization based on the theory of comparative advantage, the production of two products relative to each other is compared in one and the other country.

Example

Two countries A and C produce raw materials and equipment. The production capabilities of the two countries are determined by the following data.

Product

Country A

Country From

Raw materials, t/h

15

5

Equipment, pcs/h

20

10

If countries are closed, domestic consumption in each country will be determined by domestic production. For the country A in conditions of limited resources, the production possibilities will be an alternative: 15 tons of raw materials or 20 pieces. equipment per hour. For country With - 5 tons of raw materials or 10 units. equipment per hour. Country A has absolute advantages both in the production of raw materials (15 & gt; 5) and in the production of equipment (20 & gt; 10).

To determine the specialization, it is necessary to calculate relative prices. The relative price of raw materials in the country A: P with = 20: 15 = 1.3 units. about. The relative price of raw materials in the country C: R with = 10: 5 = 2 units. raw materials. Obviously, the relative price of raw materials is lower in the country A, therefore, buying raw materials in the country A, country With will have a gain compared to if it produced it in the domestic market. Conversely, the relative price of equipment in the country C (Rob = 5: 10 = 0.5 units of raw materials) is lower than in the country A (= i = 15: 20 = 0.75 units of raw materials), so the country A it is more profitable to purchase equipment in the country C, than to produce itself. Since the relative price of raw materials is lower in the country A, and equipment - in the country C, specialize in these countries.

The gain will be obtained on condition that the world relative price will be within the limits of the change in internal relative prices. For example, P c = 1.5 units. about. Then for the exchange 15 - 1.5 = 22.5. Country A will receive a win - 22.5 - 20 = 2.5 units. about. Country C will receive a win - 10: 1,5 - 5 = 6,7 - 5 = 1,7 units. about.

Thus, for workers in both countries, trade means increased consumption of both raw materials and equipment. At the same time, both countries remain in advantage, as trade opportunities expand the opportunities for domestic consumption of both goods in both countries (Figure 10.7)

Expanding consumption opportunities due to international trade (theory of comparative advantages)

Fig. 10.7. Expanding consumption opportunities due to international trade (theory of comparative advantage)

As a result of trading on the basis of comparative advantages, as well as on the basis of absolute, each country receives a positive economic effect, called the gain from trade. The theory of relative advantages is valid in relation to any number of goods and to any number of countries, provided that trade is carried out on the basis of free market laws, without interference from the state.

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