What is {term}? 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.

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Basic Concept Of Absolute Advantage

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.