Absolute Advantage In The 19th Century

As volumes of trade increased, a newer theory was offered in the 18th century by Adam Smith, who introduced the concept of absolute advantage. Smith was the first to point out that unrestricted trade and free international competition benefit a nation more than the Mercantilist thinking (Schumacher, 2012): according to Smith, specialisation and concentration of workers on a single task in a factory would lead to greater skill and overall higher productivity than what would be achieved if these workers attempted to carry out many different activities. Hence, workers that specialise have an absolute advantage over others (Yu, 2011). Similarly, if other workers abroad focused on another activity, nations could trade their commodities with each other. Society as a whole would gain as resources would be used more efficiently and total production of both commodities from the same resources would be higher.
Theory of absolute advantage was developed into theory of comparative advantage in the 19th century by David Ricardo who proved that a nation could engage in trade even if it was less efficient than another nation in production of both commodities. The worse-off …show more content…
Hence production specialisation leads to economies of scale. Staffan Linder argued in 1961 that a nation would focus on producing products for which a large domestic market exists (Vaghefi, Paulson, & Tomlinson, 1991), i.e. economies of scale would be achieved from domestic sales, with firms gradually expanding to other nations with similar tastes and income levels after acquiring expertise at home. Such an argumentation ultimately led to formulation of the Uppsala internationalisation model in 1977 by Johanson and Vahlne and similar conclusions by Luostarinen in the Helsinki internationalisation model in