What Is Absolute Advantage?
Definition: Absolute advantage is defined as the capacity of a producer to produce a larger quantity of commodities compared to other individuals or groups with the same quantity of inputs per unit of time.
Absolute advantage is an economic term that refers to the ability of a producer to carry out a particular economic activity, which results in more efficiency than its competitors. An individual, business, or country with absolute advantage produces more of a good or service than competitors by utilizing the same amount of resources.
Absolute advantage refers to the more significant gains of a single producer as opposed to its competitors. It is somehow related to the comparative advantage as it can open up more opportunities for the division of labor and gains from trade.
Understanding the Concept of Absolute Advantage
Tracing back to the origin of the absolute advantage concept, it was first written in a book, “The wealth of nation”. The author, Adam Smith who is also known as a father of economics.
In his theory, he countered that every nation couldn’t become rich at once. One of the reasons being the export of a nation will be the import of another nation. Hence the exporting nation will have the advantage of having the monetary advantage.
He has emphasized the specialization of labor. Also, according to him, the nation’s wealth depends on the commodities available to its citizen.
Smith pointed out that the nation should specialize in producing commodities that are advantageous in monetary terms.
Assumptions Of Adam Smith’s Theory On Absolute Advantage
Adam Smith came up with the principle of absolute advantage in the context of international trade, by utilizing labor as the only input. Some of his assumptions are-
- The relative amount of labor required in the production process is used for calculating the cost of commodities.
- Labour is mobile within the country and immobile between the countries.
- Adam Smith, while developing his theory, has considered a two-country and two-commodity framework for his analysis.
- Any trade between two nations that would take place would have a lower cost in producing one of the commodities.
Absolute Advantage vs Comparative Advantage
Both absolute and comparative advantage are essential concepts. As they help the individual to take important trade decisions. However, both concepts are different from each other in various terms.
The absolute advantage is the ability to produce a particular commodity, especially at a lower marginal cost compared to its competitor. At the same time, comparative advantage enables a nation in producing a specific commodity at a lower opportunity cost.
Hence, absolute advantage deals with the lower marginal cost of production of a specific good. In comparison, comparative advantage focuses on both the lower marginal cost and opportunity cost of producing a specific good or service.
Absolute advantage dictates that it may not always be mutually beneficial for both the nations involved in the trade transaction. On the other hand, comparative advantage ensures that both the nations involved are mutually benefitted.
In terms of cost of production, absolute advantage lowers the cost of production of a specific good compared to its competitors. In comparative advantage, the producer lowers the opportunity cost of production of a specific good compared to its competitors.
Advantage of Concept of Absolute Advantage in Producing Good or Service
Some of the advantages of the absolute advantages are;
- Overall production of the commodities is of lower cost due to the cheaper alternative of raw materials.
- Fewer materials are used to produce the final product. Hence it cuts down the operating time.
- In terms of hourly wages, cheap labor is used to produce the final product.
- This concept allows for the specialization or division of labor, which results in the higher productivity of goods at a lower production cost.
- Improves the efficiency in making the decisions, for instance, resource allocation by a nation for the production of the commodities.
Downsides of Absolute Advantage in International Trade
Following are some of the drawback of absolute advantage;
- The theory of absolute advantage dictated that only two-way trade can occur between any two nations with any two commodities that are to be exchanged. Due to the advancement of technology, this assumption now does not work. The theory failed to take into account the multilateral trade that has become very common now.
- According to the theory, free trade exists between the nation. Hence not taking into consideration the trade policies of the nations.
- At present date, the comparative advantage concept is more effective than the absolute advantage. It helps in practical decision-making.
How Absolute Advantage Benefits a Nation?
The concept of absolute advantage shows how countries can gain from trade by mastering the skills of-
- Producing and exporting the goods that they produce more efficiently than other countries and
- Importing goods that other countries produce with better efficiency
This helps both the nations involved in international trade as long as they each have at least one product or service for which they enjoy an absolute advantage over the other.
Examples of Nations having Absolute Advantages
Saudi Arabia is one of the best examples of absolute advantage, as it has great efficiency in extracting oil that reduces the cost of extraction and enables it to enjoy an absolute advantage over other nations.
In the same way, Colombia is one nation that has the best climate for growing coffee while Zambia is a nation that is highly efficient with some of the world’s richest copper mines.
On the concluding note, it is clear that absolute advantage is an international trading concept that suggests a producer can produce a good or service in greater quantity for the same cost or it may produce the same quantity at a lower cost in comparison to other competitors.
How effective and useful do you find the concept of absolute advantage in producing a good or service?
How would you differentiate absolute and comparative advantage in your words? Share with us in the comment section below.