Introduction

In response to the mercantilism system which dominated economics thought in the 18 century, Adam Smith introduce and gives extension discussion of absolute advantage theory in international trade and illustrate what to do if countries do not stick to the rule and maxim of international trade in An Inquiry into the Nature and Causes of the Wealth of Nations. Adam Smith prove wrong the belief of international trade between country was zero sum game which means the gaining of a country from international trade was the loss of other country. In additional, the international trade was positive sum game which means countries will gain benefit from trades.

In the illustration of absolute advantage theory, Adam Smith illustrate that a country which have absolute advantage over other country if its production capacity in goods and services is greater when using same amount of resources or its produce a good using fewer resources (lower opportunity cost). Adam Smith also says that a country should produce goods where its production capacity is the most efficient and trade those goods where its production is not efficient. In additional, absolute advantage theory can also applies in the regions, cities and firms and tariffs and quotas should not restrict international trade.