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Absolute Advantage

Updated on July 15, 2024 , 3877 views

What is Absolute Advantage?

Absolute advantage is the ability of an individual, firm or a country to produce a better quantity of goods, services or products than its competitors with the same quantity of inputs as its competitors.

The concept of Absolute Advantage was coined by the father of Economics, Adam Smith, in his book Wealth of Nations. This was done to show the advantage countries can get if they produced and exported goods they were specialised in. The countries with absolute advantage can spend more of their time and energy in producing goods and services they are great at and export it. The Income from this export can be used to purchase other goods and services from other countries with an absolute advantage in the same.

Absolute Advantage

According to Adam Smith, specialising in the production of goods and services so that each country has an absolute advantage in trading them can make all the countries better off. They will each have at least one product as an absolute advantage over other nations.

Example of Absolute Advantage

For instance, France and Italy both produce cheese and wine. France produces 1000 litres of wine while Italy produces 900 litres of wine. On the other hand, France produces 500 kgs of cheese while Italy produces 600 kgs of cheese. Both are producing both the products with minor differences but none have an absolute advantage in either of the two.

Absolute advantage takes this into account and will have France focus on gaining an absolute advantage in wine and Italy gaining an absolute advantage in cheese. This is because both can do better in what they are producing better than each other which will help them with the export and also having the absolute advantage over that product.

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Now, France can produce more than 1000 litres of wine and Italy can produce more than 600 kgs of cheese. The mutual gain trade is what forms the Basis of Absolute Advantage concept. According to Adam Smith, specialisation, division of labour and trade can help nations increase in their wealth. Everyone benefits from the situation.

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