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.


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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.

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  1. How does comparative advantage influence the balance of payments?

    Comparative advantage influences the balance of payments through its effect on the current account. The balance of payments ... Read Full Answer >>
  2. What are some real life examples of absolute advantage?

    Absolute advantage is fairly simple to identify in theory, but it can be difficult to tease out in practice. Even with the ... Read Full Answer >>
  3. How can a company or entity maintain an absolute advantage?

    A company or entity can maintain an absolute advantage by consistently maintaining a smaller quantity of inputs to produce ... Read Full Answer >>
  4. How can a company or entity challenge the absolute advantage of another company?

    A company or entity can challenge the absolute advantage of another company or entity by requiring a smaller number of inputs ... Read Full Answer >>
  5. What are the implications of comparative advantage as it relates to international ...

    Comparative advantage was popularized by the 19th century economist David Ricardo. Countries can collectively benefit from ... Read Full Answer >>
  6. Is it possible for a country to have a comparative advantage in everything?

    In international trade, it is not possible for a country to have a comparative advantage in the production of all goods. ... Read Full Answer >>
  7. Is the production possibility frontier used by businesses to calculate their production ...

    The production possibility frontier (PPF) is used by companies to calculate production goals and can help to determine how ... Read Full Answer >>

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