Question

Which of the following is true about absolute advantage principle? According to this approach, enhanced product specialization adversely affects communal welfare. This is the only approach that can be used to explain why nations attempt to run a trade surplus. This approach allows the nation to consume more than it otherwise could, generally at lower cost. This approach explains the process by which firms acquire and retain one or more value-chain activities inside the firm.

Answer 1

The correct answer is This approach allows the nation to consume more than it otherwise could, generally at lower cost.

The term "classical trade theories" refers to the theories that emerged from debates in the second half of the 18th century that sought to systematize the functioning of international trade and therefore influenced the modern economy. Until that time, the knowledge that was possessed about foreign trade had its origin in the documents prepared by thinkers of the mercantilist school, which justified international trade by the opportunity that it offered to obtain a surplus in the trade balance. Central objective was the trade surplus, which should be achieved at any cost. Thus, to supplant the old and already obsolete mercantilist concepts, theories of thinkers emerge in the nascent branch of the economy, such as Adam Smith, David Ricardo and John Stuart Mill.

Smith, in a work originally published in 1776, developed the theory of absolute advantages as the basis of international trade. The absolute advantage obtained by a given nation, of a given good, results from greater productivity, or, in other words, using a lesser amount of input to produce that good at lower costs. Smith thought that it was not always necessary for a country to obtain foreign trade surpluses for international trade to be advantageous, and that voluntary exchanges between countries could benefit all those involved in the operation. This last idea represents an important breaking point with all mercantilist logic. There is no need to seek a surplus in trade forever and ever.