Absolute advantage refers to the ability of a person, firm, or nation to produce more of a product with the same amount of resources or the same quantity of a product with fewer amounts of resources. In other words, the best yield out of the given resources. If such is the case, then that person, firm, or nation is said to have an absolute advantage over others in producing that product or service. Basically, absolute advantage refers to the efficiency in the production that one producer has over the other. There are several real-world examples of absolute advantages that we will detail later in the article.
Adam Smith came up with the concept of absolute advantage in 1776 in his book Wealth of Nations. Smith argues that countries having an absolute advantage in an item should only produce and export that item. And they should import the other things it needs. This would put all the nations on the path to wealth.
Before we detail the real-world examples of absolute advantage, let us take a look at some hypothetical examples to better understand the concept first.
Examples of Absolute Advantage
Following are some hypothetical examples of absolute advantage:
First, let’s take a simple example of absolute advantage.
Suppose Country X can produce 10 cars or 2 bananas with a given amount of resources. Country Y, however, can produce 4 cars and 16 bananas with its resources. Apparently, this situation shows that Country X has an absolute advantage in producing cars. At the same time, Country Y has an absolute advantage in producing bananas.
Let us consider another example where Country A, in a year, can make 12 planes or 6 guns. Similarly, Country B, in a year, can make 6 planes or 12 guns. In a year, each country requires at least 4 planes and 4 guns to better their defense strength.
If there is no international trade, Country A can use one-third of the year to make planes and the remaining to make guns. This way, it would have four planes and four guns in a year. Similarly, Country B will use one-third of the year to make guns and the remaining to make planes. This way, both countries will have just enough to survive.
However, the two countries have an absolute advantage in producing one product each – Country A in planes and Country B in guns. In such a scenario, both nations can profit from international trade.
Country A should only make planes, and Country B should only make guns. They can then trade six guns for six planes. In this case, both countries would have six of each (guns and planes). Now, both countries would be better off than before because earlier (no international trade), they were producing four units of each.
Advance Level of Example
Now, let us take our example to the next level. Here we will see that one country has an absolute advantage in producing both the products.
With all its resources, Country A can produce 200 kgs of coffee or 100 kgs of tea. Similarly, Country B, with all its resources, can produce 180 kgs of coffee or 96 kgs of tea.
In this case, Country A enjoys an absolute advantage in producing both coffee and tea. This is where the absolute advantage is lacking, as it can not tell which product a country should produce if it has an absolute advantage in both products. This is where comparative advantage is useful.
Comparative advantage looks at the opportunity cost of producing each item to decide which product is more beneficial for a country to produce.
In this example, the opportunity cost for Country X for producing coffee is 0.5 kgs of tea, while the opportunity cost for producing tea is 2kgs of coffee.
Similarly, the opportunity cost for Country Y is 0.533 kgs of tea and 1.875 kgs of coffee, respectively. Thus, on the basis of comparative advantage, it will be beneficial for Country Y to produce coffee, and Country X should produce tea.
Following are some of the popular real-world examples of absolute advantage:
The most popular real-world example of absolute advantage is the oil-producing nations in the Middle East. Owing to the abundance of oil, these nations use simple, inexpensive methods to drill oil, lowering their production cost. On the other hand, countries such as the U.S. had to use expensive ways, like offshore drilling, to produce oil.
Similarly, several Central and South American nations enjoy an absolute advantage in coffee production. The climate of these countries is perfect for coffee production, making it easy and economical for them to produce coffee. On the other hand, Canada has a rather cold climate. So, it may not be able to produce coffee, or if it produces, it would be very expensive.
Chile and Zambia are also real-world examples of absolute advantage. Both nations have large reserves of copper, making it easy and cheaper for them to mine copper.
Another real-world example of absolute advantage is Italy when it comes to wine production. Italy is the biggest producer of wine, followed by Norway, Finland, and the UK. This is because Italy enjoys an absolute advantage in producing wine because of its climate that is conducive to grapes. Though other countries also grow grapes, the cost and effort that they have to put in are comparatively more.
Apart from climate, Italy also enjoys an absolute advantage because of its connection with wine production. The country has been growing wine for more than 4,000 years now. So, it has a vast amount of experience and knowledge and skilled workers, which helps it to produce wine efficiently.
Frequently Asked Questions (FAQs)
Absolute advantage refers to the ability of a person, firm, or nation to produce more of a product with the same amount of resources or the same quantity of a product with fewer amounts of resources.
The person, firm, or nation, which could produce more with the same amount of resources, has an absolute advantage over others.
In such scenarios, comparative advantage is useful. It looks at the opportunity cost of producing each item to decide which product is more beneficial for a country to produce.