Absolute Advantage

Absolute advantage is the ability of an individual, company, region or country to produce a good or service at a lower cost per unit than another entity that produces the same good or service. An entity with an absolute advantage can produce a product or service using a smaller number of inputs or a more efficient process than another entity producing the same good or service.

Absolute advantage is predominantly a theory of international trade, according to which one country can produce a good more efficiently than another country. Countries with an absolute advantage can decide to specialize in producing and selling a specific good or service and use the funds that good or service generates to purchase goods and services from other countries. Adam Smith pioneered the idea of absolute advantage in the late 18th century as part of his division of labor doctrine.

If the United States produces 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.

Using another example, Jane can knit a sweater in 10 hours, and Kate can knit a sweater in eight hours. Kate has an absolute advantage over Jane because it takes her fewer hours to produce a sweater.

Absolute advantage also explains why it makes sense for individuals, businesses and countries to trade. Since each has advantages in producing certain goods and services, both entities can benefit from trade. So, if Jane can produce a painting in five hours, but Kate requires nine hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting. Remember, Kate has an absolute advantage over Jane in knitting sweaters. If Jane and Kate specialize in the goods they each have an absolute advantage in and buy the goods they lack absolute advantage in from each other, they both benefit.

Almost all countries have an absolute advantage in the production of 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 in manufacturing because they can take advantage of low labor costs. Canada is known to have an absolute advantage in agricultural production because of its vast areas of low-cost, undeveloped land.