absolute advantage

DEFINITION: The phrase “absolute advantage” refers to the capacity of an economically productive entity—whether an individual, a firm, or a nation—to manufacture a greater number of units of a given product or service within a particular time span than any rival entity can produce in the same time span.

A company may acquire an absolute advantage in one of two ways: (1) by producing a greater quantity of unit-goods within the given time span using the same quantity of resources as its rivals; or (2) by producing the same quantity of unit-goods within the given time span using fewer resources than its rivals.

In other words, absolute advantage is the superiority enjoyed by the most-efficient producer of a given product over all other producers of that product in the world.

Absolute advantage should not be confused with comparative advantage.

Both types of advantage have to do with relative productive efficiency. However, in the absolute case, the advantage is absolute, meaning that the country in question is more efficient in producing a particular product than any other country in the world, while In the comparative case, the advantage is relative to two or more specific countries with respect to a specific product.

The notion of comparative advantage involves the phenomenon of opportunity cost.

If a country enjoys an absolute advantage with respect to some good or service, it is obvious that it ought to pursue the production of that good or the provision of that service.

However, a country that enjoys a comparative advantage over another country in the manufacture of a given good should still look at alternative lines of production. The reason is that it is always possible the country may enjoy a greater comparative advantage in one good rather than another.

ETYMOLOGY: The phrase “absolute advantage”was originated by the Scottish moral philosopher Adam Smith in his classic 1776 treatise, foundational for economics, The Wealth of Nations.

The English adjective “absolute” is attested from the fourteenth century. It derives, via Middle English absolut, from the Latin past participle absolūtus, meaning “unfettered,” “unconditioned,” “complete,” “perfect,” or “absolute,” from the verb absolvo, absolvere, meaning “to loosen,” “to free,” “to finish,” or “to complete.”

The English noun “advantage” is attested from the fourteenth century. It derives, via Middle English avantage, from the identical form in Middle French.

The French noun avantage, in turn, is closely related to the preposition and adverb avant, meaning “before” (thus “advantage” implies “beforeness,” that is, priority or superiority). Avant itself derives from the Latin adverbial phrase “ab ante” (from before).

USAGE: Adam Smith introduced the concept of absolute advantage to illustrate how nations can benefit from trade by focusing on producing and exporting goods they can produce more efficiently than other nations.

Nations possessing an absolute advantage may opt to specialize in the production and trade of particular goods or services. They may then utilize the resulting proceeds to procure various products and services from other nations.

Smith argued that nations which specialize in the manufacture of goods in the production of which they enjoy an absolute advantage, and which then trade in those goods, can make all countries better off, so long as each one enjoys an absolute advantage in the production of at least one product.

In the next couple of generations, Smith’s basic idea was refined by David Ricardo and others into the more-realistic and -flexible idea of comparative advantage, as discussed above.