Absolute Advantage
Absolute advantage is when a company can produce the same product as other companies but with fewer resources.
What Is Absolute Advantage?
Absolute advantage is a measure of how much output an organization can generate using fewer resources than another company. When one company has access to extra resources, it might be more effective in its design and production processes. One of the biggest benefits of absolute advantage is that it can make a company’s production process more efficient. For example, if one company has a higher production level than another company, it can produce more goods at the same cost. The greater the advantage, the more efficient the production process will be.
Adam Smith believed that countries should specialize in the production of goods in which they have a comparative advantage. He thought this would lead to increased efficiency and a stronger economy. Smith was a Scottish philosopher and one of the founders of modern economics.
An Inquiry into the Nature and Causes of the Wealth of Nations, written by Mr. Smith in 1776, was the first work to discuss the idea of absolute advantage. He outlined this within the framework of international commerce.
When countries specialize in certain types of industries and trade with each other, they are able to consume more goods from other countries. When a country trades with others, it becomes exposed to new opportunities and can benefit from increased access to different products.
According to Mr. Smith, it is not possible for every country to become wealthy by using mercantilist principles. This is because what one nation exports, another nation imports.
The open exchange of goods and services between nations would benefit all of them simultaneously. Every nation ought to develop expertise in areas where they hold a clear competitive advantage.
Absolute Advantage Example
An example of absolute advantage is the position of the Canadian economy in the world market for agricultural commodities. Canada has low prices and comparatively high availability of land, which gives them an edge in this market.
Countries like China, Thailand, and Vietnam specialize in the production and export of low-cost manufactured products. This is because they have significantly reduced unit labor costs, giving them a significant competitive edge.
Italy produces a lot more wine than the United States does each year. The US has to use more resources to make a bottle of wine, so Italy has a significant competitive edge. Italy’s wine production is significantly higher than the US’s throughout the same period of time.