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Absolute Advantage Homework Help

In economics the principle of absolute advantage refers to the ability of a party (an individual, or firm or country) to produce more of a good or service then competitors, using the amount of resources.

 

Origin of The Theory:

Adam Smith first described the principle of absolute advantage in the context of international trade, using labour as the only input. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.

 

Examples:

E.g.1. Party A can produce 5 widgets per hour with 3 employees

Party B can produce 10 widgets per hour with 3 employees

 

Explanation:

Assuming that the employees of both the parties are paid equally, Party B has an advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees.

Party          Widgets / hourNo. of employees
  A                     5              3
  B                    10              3

 

Party B has the absolute advantage.

E.g. 2:

Country A can produce 1000 parts per hour with 200 workers.

Country B can produce 2000 parts per hour with 200 workers.

Country C can produce 10000 parts per hour with 200 workers.

 

CountryParts / hourNo. of widgets
Country A      1000       200
Country B       2000       200
Country C     10000       200

Country C has an absolute advantage.

 

Explanation:

 

Considering that labor and material costs are all equivalent. Country C has the absolute advantage over both Country B and Country A because it can produce the most party per hour with the same number of employees.

In simple words, absolute advantage is nothing but, who can do it better, quicker and cheaper.Someone who is best at doing something is said to have absolute advantage