Absolute advantage is when a producer can produce a good or service in greater quantity for the same cost, or the same quantity at lower cost, than other producers.
Absolute advantage can be the basis for large gains from trade between producers of different goods with different absolute advantages.
Specifically, it refers to the ability to produce a certain good or service at lower cost (i.e., more efficiently) than another party. (A “party” may be a company, a person, a country, or anything else that creates goods or services.)
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 advantage in anything
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 with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves.
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. Comparative advantage focuses on the range of possible mutually beneficial exchanges.
- 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, by David Ricardo
- Real wage
- Relative price
- Revealed comparative advantage
- Ricardian model
- Supply and demand