What is ‘Absolute Advantage’
Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that same good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than other entities producing the same product or service.
BREAKING DOWN ‘Absolute Advantage’
Absolute advantage is predominantly a theory of international trade in which a country can produce a good more efficiently than other countries. Countries that have an absolute advantage can decide to specialize in producing and selling that specific product or service, using the funds generated to purchase other goods and services that it does specialize in producing. The idea of absolute advantage was pioneered by Adam Smith in the late 18th century as part of his division of labor doctrine.
General Examples of Absolute Advantage
For example, the United States may produce 700 millio gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine – the output – in the same amount of time – the input – as the United States.
Using another example, Jane can knit a sweater in 10 hours while Kate can knit a sweater in eight hours. Kate has an absolute advantage over Jane because it takes her fewer hours to produce a sweater.
However, absolute advantage also explains why it makes sense for countries, individuals and businesses to trade with one another. Since each has advantages in producing certain products and services, they can both benefit from trade. So, if Jane can produce a painting in five hours while Kate needs nine hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting. Remember Kate has an absolute advantage over Jane in knitting sweaters. If both Jane and Kate specialize in the products they have an absolute advantage in and buy the products they don’t have an absolute advantage in from the other entity, they will both be better off.
Specific Examples of Absolute Advantage
Almost all countries have an absolute advantage for at least one good or service. Absolute advantage is achieved through low-cost production. For example, China and other Asian countries are known to have an absolute advantage with manufactured goods, because they can take advantage of low unit labor costs. Canada is known to have an absolute advantage in agricultural production, thanks to its large areas of low-cost undeveloped land.