In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce specific goods at a lower opportunity cost.
Origin of the theory
The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of 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. 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.
- Party A can produce 5 widgets per hour with 3 employees.
- Party B can produce 10 widgets per hour with 3 employees.
Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees.
You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making birdhouses.
- Scenario 1: One of your friends, Gina, can print 5 t-shirts or build 3 birdhouses an hour. Your other friend, Mike, can print 3 t-shirts an hour or build 2 birdhouses an hour. Because your friend Gina is more productive at printing t-shirts and building birdhouses compared to Mike, she has an absolute advantage in both printing t-shirts and building birdhouses.
- Scenario 2: Suppose Gina wasn't as agile with the hammer and could only make 1 birdhouse an hour, but she took a sewing class and could print 10 t-shirts an hour. Mike on the other hand takes woodworking and so he can build 5 birdhouses an hour, but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts an hour. While Gina would have the absolute advantage in printing shirts, Mike would have an absolute advantage in building birdhouses.
- Irwin, Douglas 1996. Against the Tide: An Intellectual History of Free Trade.Princeton: Princeton University Press.
- Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations, The Glasgow edition of the works and correspondence of Adam Smith, edited by R.H. Campbell and A.S. Skinner, 1981, Liberty Press.
- Schumpeter, Joseph A. 1954. History of economic analysis. Twelfth printing, 1981, George Allen & Unwin.
- Trefler, Daniel. 1995. "The Case of the Missing Trade and Other Mysteries." American Economic Review 85: 1029-1046.
- 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
- "Absolute Advantage". Dictionary. Investopedia: A forbe's digital company. 2009. Archived from the original on 13 April 2009. Retrieved 2009-05-03.
- O'Sullivan, Arthur; Sheffrin, Steven M. (2003) [January 2002]. Economics: Principles in Action. The Wall Street Journal:Classroom Edition (2nd ed.). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall: Addison Wesley Longman. p. 443. ISBN 0-13-063085-3. Retrieved May 3, 2009.
- Johnson, Paul M. (2005). "Absolute advantage". A Glossary of Political Economy Terms. Department of Political Science, 7080 Haley Center, Auburn University, Auburn, AL 36849. Retrieved 2009-05-03.
- "The Principle of Comparative and Absolute Advantage". Theories. Virtual Zambia. 2009. Archived from the original on 2 February 2009. Retrieved 2009-03-03.
- Keller, Lana. "Economics: Global Trade". GED Lesson Plan. Retrieved 2009-05-03.
- Guillory, Gil (March 25, 2005). "comparative advantage versus absolute advantage". Mises Economics Blog. Ludwig von Mises Institute. Archived from the original on 30 April 2009. Retrieved 2009-05-03.
- "ABSOLUTE AND COMPARATIVE ADVANTAGE". INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION. pp. 1–2. Retrieved 2009-05-04.
- "Absolute Advantage". Prentice Hall. 2004. Retrieved 2009-05-04.
- Marrewijk, Charles van (2007-01-18). "absolute advantage". Department of Economics, Erasmus University Rotterdam:world economy. Princeton University Press. Retrieved 2009-05-03.
- Harrington, James W. "International Trade Theory". Geography 349 Absolute advantage. University of Washington. Retrieved 2009-05-04.
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- Absolute Advantage, University of Washington