Absolute advantage
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A country has an absolute advantage economically over another, in a particular good, when it can produce that good more cheaply. A country also has an absolute advantage if it can produce more of the good than another country can, with the same amount of resources.
The term is important in the theory of international trade because it is often mistakenly assumed that (to take an example) if France has an absolute advantage over England in some product, say cheese, then France will not normally import cheese from England. A seminal analysis by the 19th-century English economist David Ricardo showed that despite France's absolute advantage, it may well benefit both countries for England to produce and export cheese to France.
Ricardo identified comparative advantage, rather than absolute advantage, as the correct concept for understanding efficient patterns of production and exchange across countries. His discussion is central to modern trade theory.
The two concepts have applications outside international trade, though this is where they are most commonly used. Suppose that two castaways on a desert island gather both fruit and grain, which they then share equally between them. Suppose that Castaway A can gather more fruit per hour than Castaway B, and therefore has an absolute advantage in this good. Nonetheless, it may well make sense for A to leave some fruit-gathering to B.
One needs to look at comparative advantage rather than absolute advantage, to discover how A and B can each best allocate their effort. If A's initial advantage over B in grain-gathering is greater than his or her advantage in fruit-gathering, then fruit-effort should be transferred from A to B, to the point where A's comparative advantages in the two goods are equal. Thus it may be rational for fruit to flow from B to A, despite A's absolute advantage.
[edit] Examples
[edit] Example 1
Country A can produce product z for $1.
Country B can produce product z for $2.
Country A has an absolute advantage over Country B in product z.
[edit] Example 2
Kentucky has significant coal reserves.
Illinois does not and uses nuclear energy.
Energy Production is cheaper with coal than with nuclear energy. <--- Assumption
Kentucky has an absolute advantage in energy production.
| Topics in Trade | |
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Definitions |
Balance of payments · Current account (Balance of trade) · Capital account · Foreign exchange reserves · Comparative advantage · Absolute advantage · Import substitution · International trade |
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Organizations & Policies |
World Trade Organization · International Monetary Fund · World Bank · International Trade Centre · Trade bloc · Free trade zone · Trade barrier · Import quota · Tariff |
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Schools of Thought |
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