Absolute Advantage

Absolute advantage is basically the ability of a country, or business to produce better goods or services per unit than the cost at which any other entity produces that good or service, and the principle of absolute advantage, which is a country having the power to produce better services to competitors, using the same amount of resources. This idea was originated from one Adam Smith's publications, An Inquiry into the Nature and Causes of the Wealth of Nations. (Das, 1968, p. 1) At that period of time, the western economy was greatly based on mercantilist ideas such as high tariffs, monopolized markets, and colonization. (LaHaye, 2008, p. 1)

Adam Smith however, believed not all countries can turn rich by following mercantilism. He made use of the fact that countries have their own absolute advantage over others in certain fields, and if there is a free market for each countries to trade products that they have the absolute advantage in, he believes that the whole economy will improve as this increases the production of goods. (Marrewijk, 2006, p. 2) The following example will explain absolute advantage better.

Product A Produced Product B Produced

UK

20

50

US

35

20

Fig 1. Example showing Absolute Advantage

This graph shows the production of UK and US of product A and product B. Since absolute is only a comparison of which all other factors are to remain constant other than the productivity, which then decides who has an absolute advantage over another party, and in which field. From the two graphs, we can see that US has an absolute advantage over UK when it comes to the production of product A as she produces more, and UK has an absolute advantage over US when it comes to the production of product B for the same reason. Adam Smith suggests that countries should use their resources to develop the industry or area that they have an absolute advantage compared to other countries. This will reduce unnecessary wastage of resources, and also can allow industries that already have the advantage to improve and increase its competitiveness. This is also known as specialization.

Using the above example, we can see that UK does not have an absolute advantage at producing product A than US, and using Adam Smith's ideology, the country should stop putting in resources into production of product a because it is not as productive but rather put the resources into production of product B, where it has an absolute advantage US, vice versa to product B's case.