Question

When exports and imports are decided on the basis of costs of production, what is this concept called?

Answer 1

According to Adam Smith, it is the difference in absolute production cost that causes the emergence of trade. A country has an absolute advantage over another country in the production of a good if it can produce it at a lower cost.

It would, thus, be advantageous for the country if it specialises in the production of a cheapest good. Smith argued that a country would- produce and export that commodity in which it has an absolute advantage or lower cost and import that commodity in which it has an absolute disadvantage or higher cost.

Hence it was a cocnept of absolute advantage .