What is Absolute Advantage?
Absolute advantage is the ability of an individual, firm, area, or country to produce more of an item or service per unit of time with the same amount of inputs, or to produce the same amount of a good or service per unit of time with less inputs, than its competitors.
Absolute advantage can be achieved by producing a good or service at a lower absolute cost per unit with fewer inputs, or by a more efficient process.
Understanding Absolute Advantage
Adam Smith, an 18th-century economist, created the concept of absolute advantage in his book The Wealth of Nations to explain how countries might benefit from trade by specializing in producing and exporting things that they can produce more effectively than other countries. Countries that have an absolute advantage can choose to specialize in producing and selling a certain commodity or service and use the proceeds to buy goods and services from other countries.
Smith claimed that specializing in the products in which each country has an absolute advantage and then trading the products can benefit all countries as long as each country has at least one product in which it has an absolute advantage over other nations.
Absolute advantage explains why individuals, businesses, and governments should trade with one another. Both entities can benefit from the transaction because they each have advantages in manufacturing particular commodities and services.
Smith’s claim that specialization, division of labor, and subsequent commerce lead to an overall improvement in prosperity from which all can benefit is based on this mutual gain from trade. Smith thought that this was the genesis of the eponymous “Wealth of Nations.”
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