economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, 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 Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...

first described the principle of absolute advantage in the context of

international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significa ...

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.

Origin of the theory

The concept of absolute advantage is generally attributed to the Scottish economist

in his 1776 publication ''

The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...

,'' in which he countered

mercantilist Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduc ...

ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following

mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce ...

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 In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. C ...

. 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.

Examples

Example 1

According to Figure 1, the UK 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. The UK is able to produce one unit of cloth with fewer hours of labor, therefore the UK has an absolute advantage in the production of cloth. On the other hand, Portugal commits 90 hours to produce one unit of wine, which is fewer than the UK'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, i.e. a combined total production of 2 units of cloth and 2 units of wine. Here, if The UK commits all of its labor (80+100) for the production of cloth for which The UK has the absolute advantage, The UK 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. The combined total production in this case is 2.25 units of cloth and 2.33 units of wine which is greater than the total production of each good had there been no specialization. Assuming free trade this will lead to cheaper prices for both goods for both countries.

Example 2

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

screen printing Screen printing is a printing technique where a mesh is used to transfer ink (or dye) onto a substrate, except in areas made impermeable to the ink by a blocking stencil. A blade or squeegee is moved across the screen to fill the open me ...

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.

References

External links

Absolute Advantage
University of Washington {{economics International trade theory