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Absolute Advantage: Definition & Importance in Trade
Absolute advantage ( in production) of an individual, enterprise or nation, is the capacity to manufacture a kind of good or service with superior quantities and quality, using only the same amount of resources, capital, and time.
How should we think of Absolute Advantage
The concept of absolute advantage introduced by Adam Smith in “Wealth of Nations” pointing out that nations can gain profit from trade activities by specializing in the production and export of goods that they can manufacture more efficiently than other countries. Afterwards, they can make use of the income earned from that production and export to buy other goods and services that they do not have advantage from other countries. The result is that the productivity of these countries will be maximized, and parties finish their own job efficiently.
According to Smith’s argumentation, the specialization in the production of goods can benefit all nations, as long as each country has at least one product that they have an absolute advantage over other countries.
Specific examples of absolute advantage
Parmesan Cheese can only be produced in only a few special regions of Northern Italy, Parma, Reggop Emilia, Modena, Mantua, and Bologna. This is because only these areas have 3 types of beneficial bacteria which enables the fermentation process of milk. And this step helps to turn milk into Parmesan Cheese with a scent, flavour and texture, all of which cannot be found anywhere else.
Sekt- A Sparkling wine. The premium Sekt can only be produced from grapes which are locally grown in one of the 13 high-quality wine regions in Germany. If another country tried to create this type of wine, it is likely that the production process would significantly cost more time, effort, and money.
Another close example as mentioned in the table. Suppose that both Vietnam and the USA have 50 workers who work 8 hours a day. The USA is able to manufacture 500 electronic chips and 100 tons of rice, while Vietnam is only able to produce 100 electronic chips and 500 tons of rice. Thus, the US has an absolute advantage in the production of electronic chips, and Vietnam has an absolute advantage in the production of rice. Therefore, the US should focus on producing electronic chips instead of trying to grow rice like Vietnam. This would be the best option, then the US will export electronic chips to Vietnam in exchange for rice. Both parties benefit from this.