In economics the principle of absolute advantage refers to the ability of a party (an individual, firm, or country) to produce more of a good or service than competitors, using the number of resources.
Absolute Advantage Homework Help
Origin of The Theory:
Adam Smith first described the principle of absolute advantage in the context of international trade, using labor 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 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/hour |
No. 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.
|
Country |
Parts/hour |
No. 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 equivalents. 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 an absolute advantage.