Absolute Disadvantage: A Definition Of Absolute Advantages

Absolute Advantage

DEFINITION of 'Absolute Advantage '

The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than another party producing the same product or service.

BREAKING DOWN 'Absolute Advantage '

Here are some small examples of how absolute advantage works:

1. The United States produces 700 million gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine (the output) in

An entity can have an absolute advantage in more than one good or service. Absolute advantage also explains why it makes sense for countries, individuals and businesses to trade with one another. Because each has advantages in producing certain products and services, they can both benefit from trade.

For example:

If Jane can produce a painting in 5 hours while Kate needs 9 hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting. Remember Kate has an absolute advantage over Jane in knitting sweaters. If both Jane and Kate specialize in the products they have an absolute advantage in and buy the products they don 't have an absolute advantage in from the other entity, they will both be better off.

Absolute advantage: A country is said to have an absolute advantage over another country in the production of a good or service if it can produce that good or service (the ‘‘output’’) using fewer real resources (like capital or labor, the ‘‘inputs’’). Equivalently, using the same inputs, the country can produce more output. The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows. The fallacy of equating absolute advantages with cost advantages is a never-ending source of confusion. Deviations between the two are caused by the fact that real resources may

It is frequently argued that developing countries may lack the technology to gain an absolute advantage in the production of any good, such that they cannot possibly compete on the global market and benefit from free trade. This conclusion is wrong, however, according to David Ricardo’s model of comparative advantage (which emphasizes labor as the primary production factor and attributes the costs and benefits of trade to the differences in opportunity costs among countries), since technologically disadvantaged countries can compete on the global market by paying lower wages. It turns out those absolute advantages neither a necessary nor a sufficient condition for exporting a certain good and gaining from international trade. More factors of production: In reality, goods are produced using several factors of production simultaneously, such as capital, land, and various types of labor. Usually, goods then cannot be ranked according to absolute advantage as their production in one country requires more of one input and simultaneously less of another input than in another