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SS3: ECONOMICS - 1ST TERM

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  1. Basic Tools for Economic Analysis I | Week 1
    4 Topics
  2. Economic Lessons from Asian Tigers II | Week 2
    6 Topics
    |
    1 Quiz
  3. Human Capital Development I | Week 3
    2 Topics
  4. Human Capital Development II | Week 4
    2 Topics
    |
    1 Quiz
  5. Petroleum and the Nigeria Economy I | Week 5
    3 Topics
  6. Petroleum and the Nigeria Economy II | Week 6
    3 Topics
    |
    1 Quiz
  7. Manufacturing and Construction | Week 7
    3 Topics
    |
    1 Quiz
  8. Services Industries | Week 8
    3 Topics
    |
    1 Quiz
  9. Agencies that Regulate the Financial Market | Week 9
    9 Topics
    |
    1 Quiz
  10. International Trade | Week 10
    8 Topics
    |
    1 Quiz



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The law of absolute cost advantage was propounded by Adam Smith, he argued that it will be mutually beneficial to nations if they specialize in the production of commodities in which they have absolute cost advantages. 

To analyses and explain the law of the absolute cost advantage we are going to assume there are only two countries in the world. The absolute cost advantage is a situation whereby a country can produce a greater quantity of a particular commodity than the other country.  The countries are Nigeria and Togo and the commodities are cotton and cocoa. Let us assume that one hour the production pattern of the commodities in both countries is represented below

CountryCotton (Tones in Millions) / hrCocoa (tonnes in Millions) / hr
Nigeria10030
Togo2050
Total12080

The table above shows that Nigeria has absolute advantage in production of cotton over Togo, she was able to produce 100m in an hour while Togo could only produce 30m

From Adam smith’s theory, Nigeria should specialize and produce only cotton while Togo should produce only cocoa. He argued that both countries will gain in trade.

After Specialization

CountryCotton(in million tones) / hrCocoa(in millions tones) / hr
Nigeria200—–
Togo100
Total200100

As a result of specialization, the output of cotton and cocoa has increased. Cotton increased from 120m to 200m while cocoa increased from 80m to 100m. Hence price of the products will fall and both countries will have more of the commodities. Therefore, absolute cost advantage refers to a situation where a nation can produce a particular product more efficiently than the order.

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