Absolute Advantage
What is Absolute Advantage?
Absolute advantage is the ability of a party to produce a greater amount of a good or service than other parties using the same amount of resources.
A party has an absolute advantage if it can produce a good or service more efficiently than another party. This concept is used to explain why countries engage in international trade - they specialize in producing goods for which they have an absolute advantage and trade for other goods. Absolute advantage differs from comparative advantage, which looks at opportunity costs rather than just efficiency.
Absolute Advantage: a worked example
Give two made-up countries 100 labor hours each. Aldia can turn all 100 hours into 20 tons of wheat, or into 10 cars. Brenn can turn the same 100 hours into 12 tons of wheat, or 15 cars. Per hour, Aldia gets 20/100 = 0.2 tons of wheat against Brenn's 12/100 = 0.12 tons, so Aldia holds the absolute advantage in wheat. In cars, Brenn gets 15/100 = 0.15 per hour against Aldia's 10/100 = 0.1, so cars go to Brenn. Notice that nothing here compared what each country gave up; the winner in each row is whoever squeezes more output out of the identical 100 hours.
The mistake students make with absolute advantage
The usual error is treating absolute advantage as the thing that decides who specializes. If Aldia out-produces Brenn in both wheat and cars, students conclude Brenn has nothing worth selling. Specialization is settled by comparative advantage, which compares opportunity costs, and one country can hold the absolute advantage in every good while still facing the higher opportunity cost in one of them. The error is tempting because produces more per worker sounds like it should answer the question, but gains from trade come from differences in cost ratios, not from output totals.
Absolute Advantage questions
How do you find absolute advantage in a production table?
Absolute advantage shows up in a production table by comparing output numbers directly, as long as both parties are given the same quantity of resources. Read across the row for one good and pick the larger number. If the table instead lists inputs needed per unit, flip the comparison: the smaller input requirement wins. Never divide one good by the other for this, because that operation belongs to comparative advantage.
Can one country have an absolute advantage in both goods?
A country can have an absolute advantage in every good it makes, which happens whenever it gets more output per unit of resource in each line of production. It still gains from trade. Comparative advantage rests on opportunity cost ratios rather than output totals, so as long as the two countries give up different amounts internally, each one is the cheaper producer of something and both end up with more after trading.
Does absolute advantage matter if comparative advantage decides trade?
Absolute advantage still matters for living standards even though it does not set the pattern of trade. Getting more output per worker in every industry means more total goods available from the same resources, which is what productivity growth measures. What absolute advantage cannot tell you is which good a country should export. That answer comes from whichever good it sacrifices the least to produce.
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Related terms
Common comparisons
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