ABSOLUTE ADVANTAGE THEORY

Abstract

The theory also assumes that exchange rates are stable which in reality it is seldom. In the current economic world exchange rates changes rapidly. This can cause major loss to some country if they trade in a wrong time. This is because exchange rates play a major role in trade market. A country with absolute advantage can produce a good at lower marginal cost (fewer materials, cheaper materials, in less time etc.) This means that, the country should implement specialization in the production of such goods. Specialization of good can be made by Research and Development which leads to improvement of existing products or procedures.