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In Economics, what is Absolute Advantage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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An absolute advantage is an economic situation in which a seller is capable of producing higher quantities of a given product, while using the same amount of resources used by competitors to produce lesser amounts. It is possible for individuals, firms, and even countries to have an absolute advantage in the marketplace. The ability to produce more goods and services with more efficiency also makes it possible to earn more profits, assuming that all units produced are sold.

Cost is also a factor that is involved in determining if an absolute advantage exists. When it is possible to manufacture more products using fewer resources, this usually translates into a lower manufacturing cost per unit. Even assuming that the producer sells each unit at a cost slightly below the competition, the end result should still be a higher profit on each unit sold.

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There are a number of factors that can contribute to the creation of an absolute advantage. Companies that make use of the latest in manufacturing technology can often produce more goods and create less waste along the way, effectively manufacturing more products to sell without purchasing additional raw materials. A well-educated work force can often lead to ideas on how to manage available resources to better advantage, thus increasing the profit margin on each unit produced. A country that has ample land for farming and a climate that allows year-round crop production may have an absolute advantage over countries with less available farmland and a less favorable climate.

It is important to note that sellers can quickly lose an absolute advantage in international trade, even if all the tools are present. For example, a country that has the resources to produce and sell more soybeans than countries with similar resources may fail to maintain production at optimum levels. When this happens, that advantage never reaches its full potential, and the country’s economy does not receive the benefits it could from producing and exporting larger quantities of soybeans.

Understanding when the factors are in place for an absolute advantage is very important. Unless the seller recognizes that this state exists, it is impossible to exploit the advantage and capture additional market share from the competition. For this reason, sellers should always be on the lookout for ways to trim costs while simultaneously producing goods and services more efficiently. Monitoring production levels and evaluating the company structure for efficient operation can often lead to small changes that yield big results. This includes looking closely at marketing costs and developing approaches that are more likely to attract the attention of the buying public, making the sales effort much easier.

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burcidi
Post 3

As far as I know, comparative advantage is the new trade theory and the global economy mostly follows it.

Absolute advantage in economics is limiting because it only allows the producer with the absolute advantage to trade. But comparative advantage allows all producers with a low opportunity cost to trade. So comparative advantage theory is more beneficial.

ddljohn
Post 2

@fBoyle-- Developing nations tend to have more natural resources and lower worker costs than developed countries. This is why they may have an absolute advantage in some goods. But most of these goods are agricultural goods, clothing and household goods. The absolute advantage in producing electronics, cars and weapons mostly resides in first world countries.

It's normal for countries who have an absolute advantage in many goods to trade more. Because for every economy to do well and for consumers to have access to a variety of goods at decent prices, countries have to produce and export what they have absolute advantage in. And they need to import goods that they cannot produce at a low cost. It's just how absolute advantage trade theory works.

fBoyle
Post 1

Why do developing or newly developed nations have an absolute advantage in many goods? Why do these countries trade more?

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