In a short essay, discuss the theory of absolute advantage and the reasons a country's efficiency improves based on this theory.
Answer: The theory of absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Developed by Adam Smith, the theory of absolute advantage says the real wealth of a country consists of the goods and services available to its citizens. Smith reasoned that if trade were unrestricted, each country would specialize in those products that gave it a competitive advantage. Each country's resources would shift to the efficient industries because the country could not compete in the inefficient ones. Through specialization, countries could increase their efficiency because of three reasons:
a. Labor could become more skilled by repeating the same tasks.
b. Labor would not lose time in switching from the production of one kind of product to another.
c. Long production runs would provide incentives for the development of more effective working methods.