How would you explain Adam Smith's theory of absolute advantage?


Quick Answer

Absolute advantage is the circumstance in which a company or nation is the most productive in producing a certain good or service. The efficiency is the key component of absolute advantage and does not necessarily mean that a company or nation is the most cost-effective in production, just the amount of product made in a certain time. Adam Smith coined the phrase along with a number of other economic terms that are related to one another.

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Full Answer

It is important to note that absolute advantage is different than another economic principle called comparative advantage. A company or nation that has the comparative advantage of creating a good or service has the lowest opportunity cost of creating that good or service. Opportunity cost is measured by how much an entity has to give up in order to create a product.

Adam Smith wrote "An Inquiry into the Nature and Causes of The Wealth of Nations," a treatise that remains the cornerstone of modern economics. His theory of laissez-faire government is the foundation of capitalism. A social philosopher, Adam Smith was born in Scotland and focused on moral philosophy and government. His concept of the invisible hand in markets was an economic breakthrough that ushered in the shift from mercantilism to laissez-faire markets in West.

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