Absolute Advantage Law and Legal Definition Absolute Advantage is the general ability to produce more goods using fewer resources. This idea of absolute advantage is important for trading that occurs between both people and nations.
What is the principle of absolute advantage?
In economics, the principle of absolute advantage is the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle of absolute advantage in the context of international trade in 1776, using labor as the only input.
What is the difference between absolute and comparative advantage?
Absolute advantage can be contrasted with comparative advantage, which refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality.
What is ABS absolute advantage in economics?
Absolute advantage is an economic principle that manifests when one company can create and distribute the same goods as another company, but with fewer assets. It refers to an organization's production level. One company's greater access to resources can make its design and manufacturing processes more efficient.
What is the absolute advantage of trade?
Absolute advantage can be the basis for large gains from trade between producers of different goods with different absolute advantages. By specialization, division of labor, and trade, producers with different absolute advantages can always gain over producing in isolation.
How many birdhouses can Mike make in 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.
How many t-shirts can Mike print?
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.
Why did Smith not develop the concept of comparative advantage?
Because Smith only focused on comparing labor productivities to determine absolute advantage, he did not develop the concept of comparative advantage. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial.
How many hours of labor does the UK use to produce one unit of cloth?
Example 1. According to Figure 1, the UK commits 80 hours of labor to produce one unit of cloth, which is fewer than Portugal's hours of work necessary to produce one unit of cloth. The UK is able to produce one unit of cloth with fewer hours of labor, therefore the UK has an absolute advantage in the production of cloth.
What is absolute advantage?
In economics, the principle of absolute advantage is the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle of absolute advantage in the context of international trade in 1776, ...
How many hours does Portugal work to produce wine?
On the other hand, Portugal commits 90 hours to produce one unit of wine, which is fewer than the UK's hours of work necessary to produce one unit of wine. Therefore, Portugal has an absolute advantage in the production of wine.
Why did Smith argue that it was impossible for all nations to become rich simultaneously?
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.
What is absolute advantage?
Absolute advantage is an economic principle that manifests when one company can create and distribute the same goods as another company, but with fewer assets. It refers to an organization's production level. One company's greater access to resources can make its design and manufacturing processes more efficient.
What is the difference between absolute and comparative advantage?
Another difference between absolute and comparative advantage is their reliability on one another. Comparative advantage complements absolute advantage to provide benefits to a business or international exchange. Suppose an organization or country has several absolute advantages over counterparts. Instead of relying on the sole entity to supply assets to the rest of the world, the parties involved can focus on the comparative advantage.
Why is absolute advantage important?
One benefit of absolute advantage is it allows employees or businesses to specialize on a task where they're most productive. Specialization can delegate tasks in the workplace, which increases efficiency. For example, a fast-food restaurant has four employees working at one time. Managers learned each employee has an absolute advantage in completing an assignment. Instead of requiring the employees to do every task, the managers assign one employee to record customer's orders and one to fix beverages. The other two either prepare burgers or cook fries. The delegation creates better collaboration and decreased production time in the restaurant.
Why is specialization important in international trade?
Thanks to absolute advantage, specialization is also prevalent during international trade ventures. If one country that has an absolute advantage is producing a natural resource, then it focuses on delivering the resources to other nations that need it.
Why is geography important?
Geography: A country's location in the world can grant proximity to natural resources, which can give it an absolute advantage over other countries. For example, nations in the Middle East can produce oil more quickly and cost-effectively than countries in North America, empowering them with absolute advantage.
What is the advantage of a northwestern country?
In a northwestern country, the farmland is rich, so the growth of corn prospers in the region, providing an absolute advantage. Yet, there's a small demand for mining, and the supply of coal is low. Both countries enter an international exchange, where the eastern country gains corn and the northwestern country gains coal. The trade equally benefits the nations.
What is the importance of international trade?
In international trade, countries specialize in producing a good to service the rest of the world. Suppose two countries want to exchange resources, and they both have absolute advantages over the other in the goods they're offering. The trade between them would be helpful to both countries because they gained a resource they couldn't previously access. Examples of factors that fuel absolute advantage include:
What is the difference between absolute and comparative advantage?
Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better. Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification.
What is Ricardo's greatest contribution to the history of the world?
Ricardo has become well-known throughout history for his musings on comparative advantage. Building on research from Adam Smith along with Robert Torrens, Ricardo explains how nations can benefit from trading even if one of them has an absolute advantage in producing everything.
What is absolute advantage?
In isolation, absolute advantage describes a scenario in which one entity can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish.
What is comparative advantage?
Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison.
How many computers can China make?
China can produce 10 computers or 10 smartphones. Computers generate a higher profit. Therefore, the opportunity cost is the difference in value lost from producing a smartphone rather than a computer. If China earns $100 for a computer and $50 for a smartphone then the opportunity cost is $50.
When the profit from two products is identified, would analysts calculate the opportunity cost of choosing one option over the other?
In general, when the profit from two products is identified, analysts would calculate the opportunity cost of choosing one option over the other.
Which two countries should export textiles and import wine?
Smith described specialization and international trade as they relate to absolute advantages. He suggested that England can produce more textiles per labor hour and Spain can produce more wine per labor hour so England should export textiles and import wine and Spain should do the opposite.
Overview
In economics, the principle of absolute advantage is the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle of absolute advantage in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to have no absolute ad…
Origin of the theory
The concept of absolute advantage is generally attributed to the Scottish economist Adam Smith in his 1776 publication The Wealth of Nations, in which he countered mercantilist ideas. 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 …
Examples
According to Figure 1, the UK commits 80 hours of labor to produce one unit of cloth, which is fewer than Portugal's hours of work necessary to produce one unit of cloth. The UK is able to produce one unit of cloth with fewer hours of labor, therefore the UK has an absolute advantage in the production of cloth. On the other hand, Portugal commits 90 hours to produce one unit of wine, which is fewer than the UK's hours of work necessary to produce one unit of wine. Therefo…
Further reading
• Irwin, Douglas A. (1996). Against the Tide: An Intellectual History of Free Trade. Princeton University Press. ISBN 978-0691058962.
• Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations (Vol 1). ISBN 978-0865970069.
• Schumpeter, Joseph A. (1954). History of economic analysis. Routledge. ISBN 9781134838707.
See also
• Comparative advantage
• Economies of scale
• Gains from trade
• Global labor arbitrage
• Heckscher-Ohlin model
External links
• Absolute Advantage, University of Washington