Absolute Advantage

Loading the player...

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 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.

BREAKING DOWN 'Absolute Advantage'

Here are some examples of how absolute advantage works:

  1. 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.
  2. 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.

RELATED TERMS
  1. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  2. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  3. Absolute Value

    A business valuation method that uses discounted cash flow analysis ...
  4. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  5. Marginal Rate Of Transformation

    The rate at which one good must be sacrificed in order to produce ...
  6. Absolute Rate

    The fixed portion of an interest-rate swap, expressed as a percentage ...
Related Articles
  1. Economics

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
  2. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  3. Economics

    What Is The Difference Between Comparative Advantage And Absolute Advantage?

    When a nation can make a product at a higher quality and faster rate than another, it has an absolute advantage.
  4. Economics

    Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade

    Investopedia explains the Production Possibility Frontier, Opportunity Cost, and the differences between Comparative Advantage and Absolute Advantage.
  5. Investing Basics

    Explaining Absolute Return

    Absolute return refers to an asset’s total return over a set period of time. It’s usually applied to stocks, mutual funds or hedge funds.
  6. Forex Education

    Understanding Currency Carry Trade

    In a currency carry trade, an investor sells a currency with a low interest rate and then uses the funds to buy a different currency that’s yielding a higher interest rate.
  7. Economics

    What's a Competitive Advantage?

    A competitive advantage is an advantage a firm has over its competitors.
  8. Investing

    Capital Expenditures (CAPEX)

    Learn more about what it costs to produce goods.
  9. Stock Analysis

    2 Funds For Capturing Global Returns

    Charles Zhang shares his ideas on the best ways to respond to the current market uncertainty in today’s interview, telling MoneyShow.com’s Kate Stalter about two of his picks from the Dime ...
  10. Stock Analysis

    A Billionaire Guru Is Getting Into These 4 Stocks -- Should You?

    While ripe with actionable information, one of the primary drawbacks of SEC-required disclosures of funds' holdings is that a delay can be present between the actual trade and the time of publishing. ...
RELATED FAQS
  1. How can a company or entity challenge the absolute advantage of another company?

    Understand what absolute advantage is, and learn how a company or entity can challenge the absolute advantage of another ... Read Answer >>
  2. What are some real life examples of absolute advantage?

    Learn about absolute advantage, comparative advantage and their impact on trade through a real-world example involving call ... Read Answer >>
  3. What are specialization and comparative advantage in international trade?

    Take a closer look at David Ricardo's revolutionary insight about specialization and comparative advantage and the benefits ... Read Answer >>
  4. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Answer >>
  5. What happens when a country focuses exclusively on its competitive advantage?

    Find out what happens when a country intentionally focuses solely on its most competitive factors of production or industries ... Read Answer >>
  6. What are the implications of comparative advantage as it relates to international ...

    Discover the implications of comparative advantage for trade: maximization of returns and a place for every country at the ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center