what is absolute advantage 
absolute advantage is the ability of an individual company region or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs than its competitors absolute advantage can be accomplished by creating the good or service at a lower absolute cost per unit using a smaller number of inputs or by a more efficient process investopedia yurle villegasunderstanding absolute advantagethe concept of absolute advantage was developed by 18th century economist adam smith in his book the wealth of nations to show how countries can gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other countries countries with an absolute advantage can decide to specialize in producing and selling a specific good or service and use the generated funds to purchase goods and services from other countries smith argued that specializing in the products that they each have an absolute advantage in and then trading the products can make all countries better off as long as they each have at least one product for which they hold an absolute advantage over other nations absolute advantage explains why it makes sense for individuals businesses and countries to trade with each other since each has advantages in producing certain goods and services both entities can benefit from the exchange this mutual gain from trade forms the basis of smith s argument that specialization the division of labor and subsequent trade lead to an overall increase in prosperity from which all can benefit this smith believed was the root source of the eponymous wealth of nations 1absolute advantage vs comparative advantageabsolute advantage can be contrasted with comparative advantage which is when a producer has a lower opportunity cost to produce a good or service than another producer an opportunity cost is the potential benefits an individual investor or business misses out on when choosing one alternative over another 2absolute advantage leads to unambiguous gains from specialization and trade only in cases where each producer has an absolute advantage in producing some good if a producer lacks any absolute advantage then adam smith s argument would not necessarily apply however the producer and its trading partners might still be able to realize gains from trade if they can specialize based on their respective comparative advantages instead 3 in his book on the principles of political economy and taxation david ricardo argued that even if a country has an absolute advantage over trading many kinds of goods it can still benefit by trading with other countries if that have different comparative advantages 4assumptions of the theory of absolute advantageboth smith s theory of absolute advantage and ricardo s theory of comparative advantage rely on certain assumptions and simplifications in order to explain the benefits of trade 41both theories assume that there are no barriers to trade they do not account for any costs of shipping or additional tariffs that a country might raise on another s imported goods 41 in the real world though shipping costs impact how likely both the importer and exporter are to engage in trade countries can also leverage tariffs to create advantages for themselves or disadvantages for competitors both theories also assume that the factors of production are immobile in these models workers and businesses do not relocate in search of better opportunities this assumption was realistic in the 1700s in modern trade however globalization has now made it easy for companies to move their factories abroad it has also increased the rate of immigration which impacts a country s available workforce in some industries businesses will work with governments to create immigration opportunities for workers that are essential to their business operations more crucially these theories both assume that a country s absolute advantage is constant and scales equally in other words it assumes that producing a small number of goods has the same per unit cost as a larger number and that countries are unable to change their absolute advantages in reality countries often make strategic investments to create greater advantages in certain industries absolute advantage can also change for reasons other than investment natural disasters for example can destroy farmland factories and other factors of production pros and cons of absolute advantageone advantage of the theory of absolute advantage is its simplicity the theory provides an elegant explanation of the benefits of trade showing how countries can benefit by focusing on their absolute advantages however the theory of comparative advantage does not fully explain why nations benefit from trade this explanation would later fall to ricardo s theory of comparative advantage even if one country has an absolute advantage in both types of goods it will still be better off through trade in other words if one country can produce all goods more cheaply than its trading partners it will still benefit by trading with other countries also as explained earlier the theory also assumes that absolute advantages are static a country cannot change its absolute advantages and they do not become more efficient with scale actual experience has shown this to be untrue many countries have successfully created an absolute advantage by investing in strategic industries 3in fact the theory has been used to justify exploitative economic policies in the postcolonial era reasoning that all countries should focus on their advantages major bodies like the world bank and imf have often pressured developing countries to focus on agricultural exports rather than industrialization as a result many of these countries remain at a low level of economic development 56simple illustration of why countries can benefit by trading on their advantages lacks the explanatory power of the theory of comparative advantage 