ABSTRACT
The concept of absolute advantage originates from Adam Smith’s labor theory of value. The real cost of a commodity is the labor time required to produce the good. For example, if a shoemaker makes a pair of shoes in five hours and a tailor sews a dress in ten hours, the real cost of these goods is five and ten hours respectively. Individuals trade these goods using the real exchange rate or barter terms of trade. In the previous example, the tailor requires two pairs of shoes for each dress she creates since dress production requires twice the number of labor hours as shoe manufacturing.
