Absolute advantage
From Economypedia.com
Absolute advantage refers to the ability of an economic unit (a country, for example) to produce more of any given goods at a lower cost of production than another economic unit.[1] It is a relative term and is calculated through comparisons with other economic units.
Absolute advantage is used to compare the [[productive efficiencie]link title]s between different countries or [[[economic units]]].
However, to determine the potential welfare from trade and specialization, comparative advantage is usedlink title.
The theory of absolute advantage is said to have been developed by David Ricardo and to some degree John Stuart Mill. Adam Smith's concepts of international trade led to the development of theories of absolute and comparative advantage. [2]
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Examples
Here are some examples illustrating [absolute advantage]:
- China has an absolute advantage over Sri Lanka in its production of rice, simply due to its size and economies of scale.
- If the [United States of America] has an absolute advantage over France in the production of copper, then the use of labor resources for the production of copper in the US is less than that in France.
Absolute advantage vs. competitive advantage
In the example on the right, both Canada and Russia can produce only a finite amount of a combination of oil and coal. Each could produce a lot of one and less of another, depending on what is most efficient. Either country can produce an amount anywhere along the red line (at the far left represents more coal; far right, more oil).
Absolute advantage
In the example on the right, we see that Russia has an absolute advantage in both the production of oil and coal. In no way can Canada produce more coal or oil than Russia. That is to say Russia's production possibility curve is to the right of Canada's.
Comparative advantage
If Russia produced one more unit of coal, it would have to sacrifice production of about half a unit of oil. And when Canada produces one additional unit of coal, it loses two units of oil. Russia will lose fewer resources if it produces more coal, versus oil.
What would the opportunity cost be to Canada if it produced one more unit of oil? If it did this, it would have to sacrifice two units of coal. Canada can maximize its production by producing oil.
Russia should focus on producing coal, and Canada should concentrate on oil. Then, any extra product should be traded.
See also
References
- ↑ http://www.investorwords.com/5389/absolute_advantage.html
- ↑ http://www.econlib.org/library/Enc/bios/Smith.html
- Economyprofessor.com definition of absolute advantage
- Nationmaster.com definition of absolute advantage
