Explain Adam Smith’s Absolute Advantage Theory
Between the 17th and the 18th centuries, mercantilism emerged as a dominant economic philosophy. This particular economic philosophy advocated for aggressive efforts towards increasing exports and severe restrictions towards reducing imports. Nations would, therefore, become rich by exporting more than they imported. By developing the absolute advantage theory, Adam Smith was trying to counter the mercantilist ideas. Adam Smith opined that it was not possible for all countries to enrich themselves simultaneously on the basis of the mercantilist principle because the export commodities of one nation may constitute import commodities of another nation. On the other hand, pursuing free trade and practicing specialization is bound to benefit all nations at the same time because of the absolute advantage theory.
In order to determine Smith’s absolute advantage, one simply has to compare labor productivities between countries. Let us assume that a country like the US has an absolute advantage in wheat and that the UK has an absolute advantage in cloth production. Based on Smith’s hypothesis of absolute production, the US would only end up producing wheat because this is its absolute advantage, while the UK would end up producing cloth as this particular commodity is the country’s absolute advantage. In case the UK stops producing wheat to concentrate on cloth production, the number of hours spent in wheat production can now be converted into labor time in cloth production. Nations stand to increase the qualities of goods “in which they have the absolute advantage with the labor time they save through international trade”.
In his book, “The Wealth of Nations”, Adam Smith’s main focus lies in the idea of economic growth. Smith believed that the division of labor led to economic growth. This notion relates mainly to ensuring there is specialization in the labor force. In other words, it entails breaking down large activities into various minute components. Such a working regime enables each worker to gain specialization in a certain area of the production process. In the end, a worker may end up increasing his/her efficiency in executing the work that has been allocated to him/her.
The firm is also able to save money and time since workers do not have to keep on switching from one task to another. However, there is the risk of having a dissatisfied and ignorant workforce because workers are compelled to perform repetitive and mundane tasks. This problem can be solved by educating the workforce in a bid to fix the harmful impact of factory life. In addition, division of labor means that an individual employee is assigned the task that he/she is most suited for. Besides resulting in the production of tangible objects, productive labor should also create a surplus in which a firm can then reinvest into its production department. This way, the division of labor contributes to increased productivity.