What is an Absolute Advantage and what are its benefits?

FinanceBanking & FinanceTrading

If an entity can produce an equal amount of unit outputs using fewer inputs or if it can produce more outputs in a unit amount of time, it is known as the absolute advantage of the entity. For example, the extraction of crude oil is an absolute advantage of Saudi Arabia as it does not have to spend much like other countries to extract the crude oil.

In the case of absolute advantage, the entity can produce a good at a lower cost than other entities. The entities can be an individual, region, company, or country. An entity having an absolute advantage can manufacture or produce a good at a lower unit cost than other entities. So, it has a better opportunity to sell it to other entities and thereby earn good revenues.

Although it is applicable to other entities, absolute advantage is primarily used in the case of nations. For example, Colombia's absolute advantage is Coffee and it produces a significant amount of Coffee than other nations. This provides valuable revenue to the nation.

What is Comparative Advantage?

Although comparative advantage is often taken as an absolute advantage, the two ideas are different. In the case of comparative advantage, there are more than one entities that produce the same good and one has an advantage over the other. In the case of absolute advantage, the benefits are primarily attached to only one country or region.

Absolute advantage makes a country superior in terms of the production of a specific good or service, and it makes the country the most powerful entity in the market. However, a nation with a comparative advantage can still be able to remain a strong contender with its comparative advantage in the market.

Benefits of Having an Absolute Advantage

A country with an absolute advantage is better off in economic status due to its advantage. It can produce more goods or goods of better quality in less time to improve its economic and financial conditions. The absolute advantage helps a nation in having a better revenue generation stream and thereby it is a positive aspect for the countries with absolute advantage.

The Father of Economics, Adam Smith had mentioned in the book "Wealth of Nations," that countries with absolute advantages can sell their products and earn more in comparison to other countries not having any advantage. Nations may use the earned revenues to buy other items needed and may be better off the deal. However, to avail of such benefits, countries should have at least one absolute advantage.

Points to Note

  • Comparative advantage compares two nations on their production capacity.

  • Absolute advantage is the advantage a nation has on the production of a specific good or service.

  • Absolute advantage helps nations generate more revenues.

raja
Updated on 27-Jul-2021 12:05:27

Advertisements