Adam Smith developed the theory of absolute cost advantage as the basis of foreign trade. Accountancy to Smith, an exchange of goods will take place only if each of the two countries can produce one commodity at an absolutely lower production cost than the other country. This is explain by taking an example.
| Country | X | Y |
|---|---|---|
| A | 10 | 5 |
| B | 5 | 10 |
In the diagram Y_A X_A is the production posiblity curve of contry A which shows that it can produce either OX_A of X commodity or OY_A of Y commodity. Similarly country B can produce either either of OY_B of Y commodity or OX_B of X commodity the diagram shows that country A has an absolute advantage in the production odf commodity X(OX_(A > OY_A )) and country B has an absolute advantage in the production of y(OY_B>OX_B)