Answer to Question #272551 in Economics for Hafsa

Question

what was the basis for and the pattern of trade according to adam smith? how were gains from trade generated? what policies did Smith advocate in international trade? what did he think was the proper function of government in the economic life of the nation?

Answer 1

In 1776, Adam Smith argued that absolute cost difference or absolute advantage is the basis of trade. Adam Smith argued that a country will export that commodity in which it has an absolute advantage and import that commodity in which it has an absolute disadvantage.

Smith argued that by giving everyone freedom to produce and exchange goods as they pleased (free trade) and opening the markets up to domestic and foreign competition, people's natural self-interest would promote greater prosperity than with stringent government regulations.

Smith said that a free market would be beneficial to everyone and that if the government would stay out of the system, and that the business would create money and goods on own. He believed the government should prevent harm to others, and help the working class.