Adam Smith's Absolute Advantage Theory
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Questions and Answers

What is the main idea behind Adam Smith's absolute advantage theory?

  • Countries should specialize in producing goods for which they have a lower opportunity cost. (correct)
  • Countries should focus on producing goods with higher profit margins.
  • Countries should trade with each other only if they have an absolute advantage in all goods.
  • Trade is beneficial only if one country has an absolute advantage in all goods.

    • What is the assumption behind Adam Smith's absolute advantage theory?

  • Countries have differentfactor endowments and technology.
  • Only two countries participate in international trade.
  • Trade is restricted by government policies.
  • All countries have access to the same technology and resources. (correct)

    • What is the benefit of trade according to Adam Smith's absolute advantage theory?

  • Increased economic growth through specialization. (correct)
  • Reduced competition in the domestic market.
  • Lower prices for imported goods.
  • Increased production of goods with lower opportunity costs.

    • Which of the following is a limitation of Adam Smith's absolute advantage theory?

    <p>It assumes that countries have access to the same technology and resources.</p> Signup and view all the answers

    What is the difference between Adam Smith's absolute advantage theory and comparative advantage theory?

    <p>Absolute advantage focuses on the opportunity costs of production, while comparative advantage focuses on the absolute costs.</p> Signup and view all the answers

    Study Notes

    Adam Smith's Absolute Advantage Theory

    • The main idea behind Adam Smith's absolute advantage theory is that countries should specialize in producing goods for which they have an absolute advantage in production, and trade with other countries to obtain goods in which they do not have an absolute advantage.

    Assumptions

    • The assumption behind Adam Smith's absolute advantage theory is that one country is more efficient than another country in producing a particular good.

    Benefits of Trade

    • The benefit of trade according to Adam Smith's absolute advantage theory is that it allows countries to specialize in producing goods in which they have an absolute advantage, leading to increased efficiency and productivity.

    Limitations

    • A limitation of Adam Smith's absolute advantage theory is that it assumes that trade takes place between two countries, and does not account for multiple countries or complex trade relationships.

    Comparison with Comparative Advantage Theory

    • The main difference between Adam Smith's absolute advantage theory and comparative advantage theory is that absolute advantage focuses on the absolute productivity of one country compared to another, whereas comparative advantage focuses on the opportunity cost of producing one good versus another.
    • Absolute advantage is based on the idea that countries should specialize in producing goods for which they have an absolute advantage, whereas comparative advantage is based on the idea that countries should specialize in producing goods for which they have a lower opportunity cost.

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    Description

    Test your understanding of Adam Smith's absolute advantage theory, its assumptions, benefits, and limitations. Learn how it differs from the comparative advantage theory.

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