What is Absolute Advantage Theory
Absolute Advantage is an economics theory that suggested a country has an absolute advantage in the production of a product when the country can produce with more efficiently than any other competitor country.
However, it is possible for a country to have no any absolute advantage and possible to have an absolute advantage in everything.
The absolute advantage is considered by comparison of productivities for the same amount of inputs, a nation has an absolute advantage when they can produce more productivity with that condition.
According to the absolute advantage principle, the country should specialize in the production of goods that they had an absolute advantage and then export these for the goods that produce by other countries.
By specializing in the production of goods that had an absolute advantage, the country can benefit more by trade those goods. Since the country can produce more with specialized compared to other countries.
Therefore, the country should never produce goods that the country can import at a lower cost from other countries that can produce with more efficiently.
Although the absolute advantage was originally described in the context of international trade, the principle of absolute advantage can adapt to a business level as well. Since the business can achieve the absolute advantage by producing a good or service with more efficiency than any other competitors.
Key Points
- Absolute Advantage is a theory that suggested a country has an absolute advantage in the production of a product when the country can produce with more efficiently than any other competitor country.
- The country can have an absolute advantage by produce a larger amount of a goods or service compare to another country in producing it for the same amount of input.
- Adam Smith suggested that the country should specialize in the production of goods for which they have an absolute advantage and then trade these for goods that produce by other countries.
- The country that specializing in the production of a goods that had an absolute advantage, they can benefit more by export those goods because the country can produce more with specialized.
Example of Absolute Advantage
Assume that the world had two countries and two product. Suppose that it the United Kingdom and the United States, both are equally endowed with 1000 units of resources. They can produce the quantities of rice and cloth as the following table.
According to the table, the United States has an absolute advantage in the production of cloth. The United States takes 20 resources to produce a bolt of cloth, while the United Kingdom needs 50 resources.
The United Kingdom has an absolute advantage in the production of rice. The United Kingdom takes 10 resources to produce a ton of rice, while the United States needs 25 resources.
From this situation, Adam Smith will suggested the United States should specialized in the production of cloth, while the United Kingdom should specialized in the production of rice.
The United States could get the rice as they needed by export cloth to the UK and import rice in exchange. Conversely, the United Kingdom could get the cloth as they needed by export rice to USA and import cloth in exchange.
Example in Real Life
To make it simply, let’s see the absolute advantage example in real life. Eric and Helen are employee of a random coffee shop. Eric can produce 6 cups of coffee and 12 cups of milk tea per hour. Helen can produce 10 cups of coffee and 8 cups of milk tea per hour.
From the example, Eric has an absolute advantage in making milk tea. Helen has an absolute advantage in making coffee.
History of Absolute Advantage
The theory of Absolute Advantage was advocated by Adam Smith in 1776 in his signature book “The Wealth of Nations”. Adam Smith argued against the mercantilism assumption that trade is a zero-sum game under free trade.
Adam Smith argued that is was impossible for all countries to become wealthy by following mercantilism theory because it was a zero-sum game, the export of a country means the import of another nation.
That’s why the absolute advantage theory suggested each country to specialize in produce those goods that they can produce with most efficiently. Nevertheless, it is possible for a country to have no any absolute advantage, and it is possible for a country to have an absolute advantage in all goods.
From this blind spot, in 1817 David Ricardo took Adam Smith’s absolute advantage for the next step in Comparative Advantage to explore what if a country has an absolute advantage in all goods.
Frequently Asked Questions
The ability of a country (or business) to produce a good with more efficiently than other competitors.
In 1 hour, Eric can produce 6 cups of coffee and 12 cups of milk tea. Helen can produce 10 cups of coffee and 8 cups of milk tea. Eric has an absolute advantage in milk tea. Helen has an absolute advantage in coffee.
Specialize in producing goods or services with most efficiently than any other competitors country.
The absolute advantage is focused in produce a good that they can produce with more efficiently compare to any other country. But the comparative advantage is focused on produce a good with lower opportunity cost.
