Absolute Advantage

Definition of 'Absolute Advantage'


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 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 another party producing the same product or service.

Investopedia explains 'Absolute Advantage'


Here are some examples of how absolute advantage works:

-The United States produces 700 million 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.

-Jane can knit a sweater in 10 hours, while Kate can knit a sweater in 8 hours. Kate has an absolute advantage over Jane, because it takes her fewer hours (the input) to produce a sweater (the output).

An entity can have an absolute advantage in more than one good or service. Absolute advantage also explains why it makes sense for countries, individuals and businesses to trade with one another. Because each has advantages in producing certain products and services, they can both benefit from trade. For example, if Jane can produce a painting in 5 hours while Kate needs 9 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.



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