20253rd SemesterAntim PraharMBA

International Business Management

1 Absolute cost Theory and Comparative Cost Theory 

Absolute Cost Theory:

Definition: The Absolute Cost Theory, also known as the Mercantilist Theory of International Trade, suggests that countries should specialize in producing goods that they can produce more efficiently and at lower costs than other countries. It emphasizes a nation’s absolute advantage in production.

Key Points:

Focus on Absolute Advantage: According to this theory, a country should produce goods in which it has an absolute advantage, meaning it can produce more units of a good with fewer resources compared to other countries.

Trade as a Means of Accumulating Wealth: The primary goal of international trade, according to the Absolute Cost Theory, is to accumulate wealth in the form of gold and silver. Countries aim to export goods in which they have an absolute advantage and import goods in which they have a disadvantage.

State Intervention: Mercantilist policies, which were based on the Absolute Cost Theory, often involved heavy state intervention in the economy. Governments imposed tariffs, subsidies, and regulations to promote exports and limit imports, with the aim of achieving a favorable balance of trade.



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