Absolute advantage
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Absolute advantage
Absolute Advantage
Wikipedia
In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to
produce more of a good or service than competitors, using the same amount of resources.[1] [2] [3] [4] [5] [6] Adam
Smith first described the principle of absolute advantage in the context of international trade, using labor as the only
input.
Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to
have no absolute advantage in anything;[7] in that case, according to the theory of absolute advantage, no trade will
occur with the other party.[8] It can be contrasted with the concept of comparative advantage which refers to the
ability to produce a particular good at a lower opportunity cost.
Origin of the theory
The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry
into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas.[7] [9] Smith argued that
it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one
nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free
trade and specialized in accordance with their absolute advantage.[7] Smith also stated that the wealth of nations
[10]
depends upon the goods and services available to their citizens, rather than their gold reserves.
While there are
possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage
focuses on the range of possible mutually beneficial exchanges.
Examples
Example 1
• Party A can produce 5 widgets per hour with 3
employees.
• Party B can produce 10 widgets per hour with 3
employees.
Assuming that the employees of both parties are
paid equally, Party B has an absolute advantage
over Party A in producing widgets per hour. This is
because Party B can produce twice as many widgets
as Party A can with the same number of employees.
Party B has the absolute advantage.
Example 2
• Country A can produce 1000 parts per hour with
200 workers.
• Country B can produce 2500 parts per hour with
200 workers.
• Country C can produce 10000 parts per hour
with 200 workers.
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Country C has the absolute advantage.
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Absolute advantage
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Considering that labor and material costs are all equivalent, Country C has the absolute advantage over both Country
B and Country A because it can produce the most parts per hour at the same cost as other nations. Country B has an
absolute advantage over Country A because it can produce more parts per hour with the same number of employees.
Country A has no absolute advantage because it can't produce more goods than either Country B or Country C given
the same input.
Example 3
You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making
birdhouses.
• Scenario 1: One of your friends, Gina, can print 5 t-shirts or build 3 birdhouses an hour. Your other friend, Mike,
can print 3 t-shirts an hour or build 2 birdhouses an hour. Because your friend Gina is more productive at printing
t-shirts and building birdhouses compared to Mike, she has an absolute advantage in both printing t-shirts and
building birdhouses.
• Scenario 2: Suppose Gina wasn't as agile with the hammer and could only make 1 birdhouse an hour, but she
took a sewing class and could print 10 t-shirts an hour. Mike on the other hand takes woodworking and so he can
build 5 birdhouses an hour, but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts
an hour. While Gina would have the absolute advantage in printing shirts, Mike would have an absolute
advantage in building birdhouses.
Further reading
• Irwin, Douglas A. 1996. Against the Tide: An Intellectual History of Free Trade.Princeton: Princeton University
Press.
• Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations, The Glasgow edition of the
works and correspondence of Adam Smith, edited by R.H. Campbell and A.S. Skinner, 1981, Liberty Press.
• Schumpeter, Joseph A. 1954. History of economic analysis. Twelfth printing, 1981, George Allen & Unwin.
• Trefler, Daniel. 1995. "The Case of the Missing Trade and Other Mysteries." American Economic Review 85:
1029-1046.
See also
• Comparative advantage
• Economies of scale
• Gains from trade
• Global labor arbitrage
• Heckscher-Ohlin model
• Intra-industry trade
• New trade theory
• On the Principles of Political Economy and Taxation
• Real wage
• Relative price
• Revealed comparative advantage
• Ricardian model
• Supply and demand
• Trade
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Saylor URL: http://www.saylor.org/courses/econ102
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References
[1] "Absolute Advantage" (http:/ / www. investopedia. com/ terms/ a/ absoluteadvantage. asp). Dictionary. Investopedia: A forbe's digital
company. 2009. . Retrieved 2009-05-03.
[2] O'Sullivan, Arthur; Sheffrin, Steven M. (2003) [January 2002]. Economics: Principles in Action (http:/ / www. amazon. com/
Economics-Principles-Action-OSullivan/ dp/ 0130630853). The Wall Street Journal:Classroom Edition (2nd ed.). Upper Saddle River, New
Jersey 07458: Pearson Prentice Hall: Addison Wesley Longman. p. 443. ISBN 0130630853. . Retrieved May 3, 2009.
[3] Johnson, Paul M. (2005). "Absolute advantage" (http:/ / www. auburn. edu/ ~johnspm/ gloss/ absolute_advantage). A Glossary of Political
Economy Terms. Department of Political Science, 7080 Haley Center, Auburn University, Auburn, AL 36849. . Retrieved 2009-05-03.
[4] "The Principle of Comparative and Absolute Advantage" (http:/ / www. bized. co. uk/ virtual/ dc/ trade/ theory/ th2. htm). Theories. Virtual
Zambia. 2009. . Retrieved 2009-03-03.
[5] Keller, Lana. "Economics: Global Trade" (http:/ / www. schools. utah. gov/ adulted/ ged/ educator/ 2002LessonPlan/
EconGlobalTrade_LKeller. doc). GED Lesson Plan. . Retrieved 2009-05-03.
[6] Guillory, Gil (March 25, 2005). "comparative advantage versus absolute advantage" (http:/ / blog. mises. org/ archives/ 003386. asp). Mises
Economics Blog. Ludwig von Mises Institute. . Retrieved 2009-05-03.
[7] "ABSOLUTE AND COMPARATIVE ADVANTAGE" (http:/ / www. skidmore. edu/ ~mdas/ AbsoluteandComparativeAdvantage. pdf).
INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION. pp. 1–2. . Retrieved 2009-05-04.
[8] "Absolute Advantage" (http:/ / flightline. highline. edu/ jward/ BUSN205. chp06. edit. ppt). Prentice Hall. 2004. . Retrieved 2009-05-04.
[9] Marrewijk, Charles van (2007-01-18). "absolute advantage" (http:/ / people. few. eur. nl/ vanmarrewijk/ pdf/ marrewijk/ absolute advantage.
pdf). Department of Economics, Erasmus University Rotterdam:world economy. Princeton University Press. . Retrieved 2009-05-03.
[10] Harrington, James W.. "International Trade Theory" (http:/ / faculty. washington. edu/ jwh/ 349lec03. htm). Geography 349 Absolute
advantage. University of Washington. . Retrieved 2009-05-04.
External links
• Absolute Advantage (http://faculty.washington.edu/jwh/349lec03.htm#absolute), University of Washington
• http://www.investopedia.com/terms/a/absoluteadvantage.asp
• http://www.investopedia.com/university/economics/economics2.asp
• Sources
http://www.
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