Absolute Advantage

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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 or by 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 according to 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 a specific product or service and use the funds generated to purchase the goods and services that it requires from other countries. 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 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. 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. 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 requires 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 for which have an absolute advantage, and buy the products for which they have no absolute advantage from each other, they both benefit.

Specific Examples of Absolute Advantage

Almost all countries have an absolute advantage in the production or 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 in manufacturing because they can take advantage of low labor costs. Canada is known to have an absolute advantage in agricultural production because of its vast area of low-cost undeveloped land.