What is an absolute advantage?
Definition: An absolute advantage is defined as the ability
of a producer to produce more goods than other individuals or groups with the
same amount of resources per element of time. technologyify
Absolute gain is an economic term that refers to the ability
of a manufacturer to carry out certain economic activities that result in
greater efficiency than its competitors. An individual, company or country with
an absolute advantage produces more goods or services than its competitors
using the same amount of resources. worldbeautytips
An absolute advantage means that a single manufacturer will
be more profitable than its competitors. This has something to do with
comparative advantage, as it can open up more opportunities for division of
labor and profits from trade. technologyford
Understand the concept of absolute advantage
Tracing the origins of the concept of absolute advantage, it
was first written in the book The Wealth of a Nation. The author, Adam Smith,
is also known as the father of economics. techiesin
In his theory, he argued that all nations cannot get rich at
once. One of the reasons a nation is exporting would be to import from another
nation. Consequently, the exporting country will have a monetary advantage.
He highlighted the specialization of the job. Furthermore,
according to him, the wealth of a nation depends on the assets accessible to
its citizen. technologyies
Smith pointy out that the nation should specialize in the
production of goods that are profitable in monetary terms.
Assumptions of Adam Smith's Theory of Absolute Advantage
Adam Smith devised the principle of absolute advantage in
the context of international trade, using labor as the sole resource. Some of
his guesses are:
The relative amount of labor compulsory in the production
process is used to calculate the value of the goods.
The workforce is mobile within a country and stationary
between countries.
Adam Smith, developing his theory, in his analysis
considered the model of two countries and two goods.
Any trade that takes place between the two countries will
cost less to produce one of the goods.
Absolute advantage over comparative advantage
Absolute and comparative advantage are important concepts.
Because they help a person make important business decisions. However, both
concepts differ from each other in different ways.
The absolute advantage is the ability to produce a specific
product, especially at a lower marginal cost compared to its competitor. At the
same time, comparative advantage enables a country to produce a specific good
at a lower opportunity cost.
Consequently, the absolute advantage is associated with the
lower marginal cost of production of a particular good. By comparison,
comparative advantage focuses on both the lower marginal costs and the
opportunity cost of producing a particular good or service.
An absolute advantage means that it may not always be
mutually beneficial for both countries involved in a trade. On the other hand,
comparative advantage ensures that both participating countries benefit from
each other.
In terms of cost of production, an absolute advantage
reduces the cost of producing a particular product over its competitors. As a
comparative advantage, a manufacturer reduces the opportunity cost of producing
a particular good relative to its competitors.
Advantage of the concept of absolute advantage in the
production of a product or service
Some of the benefits of the absolute benefits:
In general, the production of goods is cheaper due to the
cheaper alternative to raw materials.
Fewer materials are used to produce the final product.
Consequently, the operating time is reduced.
In terms of hourly wages, cheap labor is used to produce the
final product.
This concept allows for specialization or division of labor,
which leads to higher productivity of goods at lower production costs.
It improves the efficiency of decision-making, for example,
on the allocation of resources by the country for the production of goods.
Disadvantages of absolute advantage in international
trade
Below are some of the downsides to Absolute Advantage;
The theory of absolute advantage dictated that between any
two countries there could only be bilateral trade in two goods that were to be
exchanged. Due to the development of technology, this assumption does not work
now. The theory did not take into account multilateral trade, which has now
become very common.
According to the theory, there is free trade between
nations. Hence, the trade policy of nations is not taken into account.
The concept of comparative advantage is now more effective
than the absolute one.
