In economics, the principle
of absolute advantage refers to the ability of a party (an
individual, or firm, or country) to produce a greater quantity of a good,
product, 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 productiveness, 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.
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Figure
1
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Hours
of work necessary to produce one unit
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Country
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Cloth
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Wine
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England
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80
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100
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Portugal
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120
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90
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Figure
2
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Hours
of work to commit after the specialization
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Country
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Cloth
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Wine
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England
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80 +
100
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0
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Portugal
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0
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90 +
120
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According to Figure 1,
England commits 80 hours of labor to produce one unit of cloth, which is fewer
than Portugal's hours of work necessary to produce one unit of cloth. England
is able to produce one unit of cloth with fewer hours of labor; therefore England
has an absolute advantage in the production of cloth. On the other hand,
Portugal commits 90 hours to produce one unit of wine, which are fewer than
England's hours of work necessary to produce one unit of wine. Therefore,
Portugal has an absolute advantage in the production of wine.
If the two countries
specialize in producing the good for which they have the absolute advantage,
and if they exchange part of the good with each other, both of the two
countries can end up with more of each good than they would have in the absence
of trade. In
the absence of trade, each country produces one unit of cloth and one unit of
wine. Here, if England commits all of its labor (80+100) for the production of
cloth for which England has the absolute advantage, England produces
(80+100)÷80=2.25 units of cloth. On the other hand, if Portugal commits all of
its labor (90+120) for the production of wine, Portugal produces
(90+120)÷90=2.33 Units of wine. By exchanging the 2.25 units of cloth and the
2.33 Units of wine, both of the two countries can end up with more of each good
than they would have in the absence of trade.
