Absolute cost advantage
The model of absolute cost advantages is the core idea of the classical foreign trade theory . The economist Adam Smith developed this theory in 1776 in his book An Inquiry into the Nature And Causes of the Wealth of Nations (short German title: Prosperity of the Nations ). It says that foreign trade and the international division of labor benefit all countries involved. To this end, each country should specialize in the production of those goods that it can produce more cheaply than other countries, where it therefore has an absolute cost advantage.
Foreign trade and absolute cost advantage
In the fourth book of the Wealth of Nations , Smith argues that every country should produce the goods that it can produce absolutely more cheaply than abroad. In trade with the other countries, it can then exchange these for other goods. Ultimately, all countries involved in foreign trade benefit from this specialization . The limited available factors of production (capital and labor) are used more productively than with pure self-sufficiency of each country, so that ultimately each country receives more goods through foreign trade than with self-sufficiency and thus achieves a gain in welfare ( economic welfare ). This fact can be made clear with a simple example.
example
In this example, the two countries France and Ireland appear. Ireland is able to produce one unit of clothing in 10 hours, France takes 20 hours. In return, France produces one unit of coal in 10 hours, which Ireland takes 20 hours to do. So France has an absolute cost advantage in producing coal and Ireland in clothing. The requirements can be summarized in a table:
| dress | coal | |
|---|---|---|
| France | 20 h | 10 h |
| Ireland | 10 h | 20 h |
With a labor commitment of 60 hours, each country could produce two units of clothing and two coal with self-sufficiency. So there would be a total of 4 units of coal and 4 units of clothing. However, if Ireland specialized in the production of clothing, it could produce 6 units of clothing, France, with the appropriate specialization, 6 units of coal. If it comes to foreign trade and the two countries exchange 3 units of clothing for 3 units of coal, each country would have 3 units of clothing and 3 coal after the foreign trade. This corresponds to an increase of 50% compared to self-sufficiency, which makes it clear that specialization combined with foreign trade brings advantages for every country.
requirements
From the model of the absolute cost advantages there are some demands on the countries involved. As made clear by the example, every country should refrain from levying tariffs or other trade barriers so that foreign trade can take place and the prosperity of both countries increases.
Each country must also focus on producing goods where it actually has an advantage. In the example above, if France specialized in clothing production and Ireland specialized in coal mining, each country would end up with only 1.5 units of clothing and coal, a reduction of 25%.
Importance of Theory
With his model of absolute cost advantages, Adam Smith turned against the strategies of mercantilism and founded the classical theory of foreign trade . In the mercantilist system, every country tried to prevent the import of finished products and instead to produce and export them itself in order to remove larger quantities of precious metals, i.e. H. To get money. This was accompanied by a corresponding customs policy. Mercantilism's foreign trade was a zero-sum game in which one country could only win at the expense of another.
Adam Smith considered mercantilism, especially the pursuit of increasing precious metal supplies, harmful. An increase in the precious metal stocks, which were then used as cash, only increases the prices of the goods. The prosperity of a nation cannot be measured by its possession of precious metals, but by the amount of goods that were available and thus by the work done. The first sentence from Wealth of Nations expresses this:
"The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labor, or in what is purchased with that produce from other nations. "
Problems and advancement
The theory of absolute cost advantages, however, has the disadvantage that it only explains the trade that exists between countries with mutual absolute cost advantages. If a country does not have such advantages in any good, it would not participate in international trade according to the theory of absolute cost advantages. With his theorem of comparative cost advantages , David Ricardo provided an explanation why such countries should also participate in foreign trade. In doing so, he expanded Adam Smith's ideas.
Individual evidence
- ^ Dennis Barts / Dominic Tschan: Introduction to the Theories of International Enterprises. (PDF) (No longer available online.) 2014, archived from the original on September 23, 2015 ; accessed on August 8, 2015 .
- ^ Jochen Michaelis: International trade. (PDF) In: Economic contributions to the discussion. University of Kassel, 2007, accessed on August 8, 2015 .
- ^ Georg Quass: Profit as a rent: Some remarks about a pro-capitalist theory of development. (PDF) In: Working Paper. University of Munich, 2014, accessed on August 8, 2015 .
- ^ Georg Scherer: Globalization and Multinational Enterprises. (PDF) (No longer available online.) In: Vorlesung. University of Zurich, 2015, archived from the original on September 23, 2015 ; accessed on August 8, 2015 .
- ^ Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations , Volume 1, 1776, p. 1