Absolute Advantage

AAA

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.

VIDEO

RELATED TERMS
  1. Free Trade Area

    A group of countries that invoke little or no price control in ...
  2. Specialization

    A method of production where a business or area focuses on the ...
  3. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it ...
  4. Core Competency

    A narrowly defined field or task at which a company excels. A ...
  5. Narrow Moat

    A slight competitive advantage that one company enjoys over competing ...
  6. Eating Someone's Lunch

    The act of an aggressive competition that results in one company ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. The Dark Side Of The WTO
    Economics

    The Dark Side Of The WTO

  3. Macroeconomics
    Economics

    Macroeconomics

  4. Sanctions Between Countries Pack a Bigger ...
    Economics

    Sanctions Between Countries Pack a Bigger ...

comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
Trading Center