Adam Smith (5 June 1723 OS (16 June 1723 NS) – 17 July 1790) was a Scottishmoral philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment,^[1] Smith is best known for two classic works: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. Smith is cited as the "father of modern economics" and is still among the most influential thinkers in the field of economics today.^[2]

Smith studied social philosophy at the University of Glasgow and at Balliol College, Oxford, where he was one of the first students to benefit from scholarships set up by fellow Scot, John Snell. After graduating, he delivered a successful series of public lectures at the University of Edinburgh, leading him to collaborate with David Hume during the Scottish Enlightenment. Smith obtained a professorship at Glasgow teaching moral philosophy, and during this time he wrote and published The Theory of Moral Sentiments. In his later life, he took a tutoring position that allowed him to travel throughout Europe, where he met other intellectual leaders of his day. Smith laid the foundations of classical free market economic theory. The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, he expounded upon how rational self-interest and competition can lead to economic prosperity. Smith was controversial in his own day and his general approach and writing style were often satirised by Tory writers in the moralising tradition of William Hogarth and Jonathan Swift. In 2005, The Wealth of Nations was named among the 100 Best Scottish Books of all time.^[3] Former UK Prime Minister Margaret Thatcher, it is said, used to carry a copy of the book in her handbag.

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good product or service than competitors, using the same amount of resources.^{[1][2][3][4][5][6]} Adam Smithfirst described the principle of absolute advantage in the context of international trade, using labor as the only input.

Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything;^[7] in that case, according to the theory of absolute advantage, no trade will occur with the other party.^[8] It can be contrasted with the concept ofcomparative advantage which refers to the ability to produce specific goods at a lower opportunity cost.

Origin of the theory[edit]

The main concept of absolute advantage is generally attributed to Adam Smithfor his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas.^[7][9] Smith argued that it was impossible for all nations to become rich simultaneously by followingmercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.^[7] Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves.^[10] While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges.

Examples[edit]

Example 1[edit]

Party B has the absolute advantage.

• Party A can produce 5 widgets per hour with 3 employees.
• Party B can produce 10 widgets per hour with 3 employees.

Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees.

Example 2[edit]

You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making birdhouses.

• Scenario 1: One of your friends, Gina, can print 5 t-shirts or build 3 birdhouses an hour. Your other friend, Mike, can print 3 t-shirts an hour or build 2 birdhouses an hour. Because your friend Gina is more productive at printing t-shirts and building birdhouses compared to Mike, she has an absolute advantage in both printing t-shirts and building birdhouses.

• Scenario 2: Suppose Gina wasn't as agile with the hammer and could only make 1 birdhouse an hour, but she took asewing class and could print 10 t-shirts an hour. Mike on the other hand takes woodworking and so he can build 5 birdhouses an hour, but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts an hour. While Gina would have the absolute advantage in printing shirts, Mike would have an absolute advantage in building birdhouses.