Definition
In economics, the principle of absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
Absolute Advantage
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 and/or using a more efficient process than other entities producing the same product or service.
Explaining ‘Absolute Advantage’
Absolute advantage is predominantly a theory of international trade in 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 that specific product or service, using the funds generated to purchase other goods and services that it does specialize in producing. 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.
Specific Examples of Absolute Advantage
Almost all countries have an absolute advantage for 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 with manufactured goods, because they can take advantage of low unit labor costs. Canada is known to have an absolute advantage in agricultural production, thanks to its large areas of low-cost undeveloped land.
Further Reading
- Adam Smith's theory of absolute advantage and the use of doxography in the history of economics – www.ejpe.org [PDF]
- On Super Absolute Advantage of International Trade [J] – en.cnki.com.cn [PDF]
- The Gain and Loss of Absolute Advantage and Comparative Advantage [J] – en.cnki.com.cn [PDF]
- National competitiveness and absolute advantage in a global economy – mpra.ub.uni-muenchen.de [PDF]
- Efficient capital markets and martingales – www.jstor.org [PDF]
- absolute advantage 189 adverse selection 41n14 Affluent Society 52n4 Africa 108–9 An Essay on the Nature and Significance – books.google.com [PDF]
