Absolute Advantage

Absolute advantage is the ability of a producer to produce a good or service with the same or less inputs than its competitors. It can be used to gain from trade by specializing in producing and exporting the goods that it can produce more efficiently than others.

For example, suppose Brazil can produce 8 bananas or 2 cars per hour, while the US can produce 5 bananas or 12 cars per hour. Brazil has an absolute advantage in producing bananas (8 to 5), while the US has an absolute advantage in producing cars (12 to 2). If they specialize in their absolute advantage and trade, they can both increase their total output and consumption.

Absolute advantage can be contrasted with comparative advantage, which is the ability to produce goods and services at a lower opportunity cost. Opportunity cost is the value of the next best alternative that is forgone as a result of making a choice. A producer may have an absolute advantage in producing a good or service, but not have a comparative advantage in producing it. For example, suppose England can produce 60 units of cloth or 110 units of wine per hour, while Portugal can produce 120 units of cloth or 70 units of wine per hour. England has an absolute advantage in producing wine (110 to 70), but not in producing cloth (60 to 120). However, England has a comparative advantage in producing cloth, because it can produce cloth at a lower opportunity cost than Portugal. The opportunity cost of producing one unit of cloth for England is 110/60 = 1.83 units of wine, while for Portugal it is 70/120 = 0.58 units of wine. Therefore, England should specialize in producing cloth and trade it for wine, while Portugal should specialize in producing wine and trade it for cloth. By doing so, they can both increase their total output and consumption.