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 another entity that produces the same good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs or a more efficient process than another entity 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 another country. Countries with an absolute advantage can decide to specialize in producing and selling a specific product or service and use the funds that good or service generated to purchase goods and services from other countries. Adam Smith pioneered the idea of absolute advantage in the late 18th century as part of his division of labor doctrine.

General Examples of Absolute Advantage

If 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.

Using another example, Jane can knit a sweater in 10 hours, and 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.

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, both entities can benefit from trade. So, if Jane can produce a painting in five hours, but 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 Jane and Kate specialize in the products they each have an absolute advantage in and buy the products they lack absolute advantage in from each other, they both benefit.

Specific Examples of Absolute Advantage

Almost all countries have an absolute advantage in the production of 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 areas of low-cost, undeveloped land.

  1. Absolute Return

    Absolute return is the percent that an asset rises or declines ...
  2. Absolute Percentage Growth

    Absolute percentage growth is an increase in the value of an ...
  3. Competitive Advantage

    Competitive advantage is a superiority that a firm has over its ...
  4. Absolute Title

    An absolute title is a title to a property that is free of any ...
  5. Absolute Performance Standard

    The absolute performance standard is a benchmark for quality ...
  6. Absolute Beneficiary

    An absolute beneficiary is a designated beneficiary that can ...
Related Articles
  1. Insights

    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. Insights

    Explaining Comparative Advantage

    Comparative advantage is the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. Having a comparative advantage doesn't ...
  3. Personal Finance

    A Royal Budget: How Kate's Financial Life Is About To Change

    Kate Middleton is all set to marry into the British Royal Family, but do real-life princesses face budgets, money issues or financial stress?
  4. Investing

    Kate Spade Slumps After a Big First-Quarter Miss

    Shares of Kate Spade (NYSE: KATE) fell 6% on Tuesday after the handbag, fashion and accessories company posted a big first quarter miss. Revenue fell 1.2% annually to $271.23 million, missing ...
  5. Insights

    Competitive Advantage Counts

    What's the best indicator of a company's future success? Its ability to succeed when others fail.
  6. Investing

    Kate Spade Up for Grabs, Shares Up on Sale Talk

    Analysts call the New York-based fashion brand an 'attractive acquisition target.'
  7. Investing

    Kate Spade Soars on Acquistion Rumors

    Shares of Kate Spade (NYSE: KATE) skyrocketed 23% on Wednesday, on a day when trade was halted for a time due to intense volatility. Overall, 22.7 million shares were traded, compared to an ...
  8. Insights

    Steve Jobs' Iconic Black Turtleneck Now for Sale

    The company that designed the sweater worn by the legendary Apple co-founder plans to retail it starting in July.
  9. Investing

    Kate Spade Tanks as Talks With Coach Fall Through

    Sources indicate that given a deal manages to get through, it would likely value the U.S apparel and handbag company below a $2.9 billion valuation.
  1. 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 >>
  2. What is comparative advantage?

    Learn about comparative advantage, and how it is an economic law that is foundation for free-trade arguments. Read Answer >>
  3. How do I determine my company's competitive advantage?

    Find out how to determine if your company has a competitive advantage and, if so, learn how to figure out how to make it ... Read Answer >>
  4. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  5. What's the Difference Between Economy of Scope and Economy of Scale?

    Learn about economies of scope and economies of scale, the difference between the two economic concepts, and how they offer ... Read Answer >>
  6. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center