Absolute Advantage

What Is Absolute Advantage?

Absolute advantage is the ability of an individual, company, region, or country to produce more of a good or service per unit of time with the same amount of inputs, or to produce the same amount of a good or service per unit of time with fewer inputs, than its competitors. Click here to understand affidavit meaning.

Absolute advantage can be achieved by producing a good or service at a lower absolute cost per unit with fewer inputs, or by a more efficient process.

Key Takeaways

• When a producer can provide a good or service in greater quantity for the same cost, or in the same quantity at a lower cost, than its competitors, this is referred to as an absolute advantage
• Absolute advantage is a concept developed by Adam Smith. Which can be the foundation for large gains from trade between producers of different goods with different absolute advantages
• Producers with different absolute advantages can always gain more by specialisation, division of labour, and trade than producing and consuming in isolation
• Absolute advantage is distinguished from comparative advantage. Which is defined as the ability to produce goods and services at a lower opportunity cost.

Understanding Absolute Advantage

Adam Smith, an 18th-century economist, developed the concept of absolute advantage in his book The Wealth of Nations. This showed how countries can benefit from trade by specialising in producing and exporting goods. And that they can produce more efficiently than other countries.  Countries that have an absolute advantage can choose to specialise in producing and selling.

Smith argued that specialising in the products can benefit all countries as long as each country has at least one product in which it has an absolute advantage over other nations.

Absolute advantage explains why individuals, businesses, and countries should trade with one another. Because each has a competitive advantage in producing specific goods and services, both parties can benefit from the exchange.

This mutual benefit from trade is at the heart of Smith’s argument that specialisation, division of labour, and subsequent trade lead to an overall increase in prosperity from which everyone benefits. Smith believed that this was the source of the eponymous “Wealth of Nations.”

Absolute Advantage vs. Comparative Advantage

Absolute advantage differs from comparative advantage, which occurs when one producer has a lower opportunity cost to produce a good or service than another. An opportunity cost is the potential benefits that an individual, investor, or business foregoes by choosing one option over another.

Only when each producer has an absolute advantage in producing around good does absolute advantage lead to unambiguous gains from specialisation and trade. If a producer does not have an absolute advantage, Adam Smith’s argument does not necessarily apply.

However, if the producer and its trading partners can specialise based on their respective comparative advantages, they may still be able to realise trade gains.

How Can Absolute Advantage Benefit a Nation?

Adam Smith developed the thought of absolute advantage to show how countries can gain by specialising in producing and exporting goods that they produce more efficiently than other countries.

Specialising in and trading products can benefit both countries as long as each has at least one product in which they have a distinct advantage over the other.

Know more regarding break even point.