In short it’s the ability of a country or a company to produce a specific good or service more effectively and efficiently than its rivals is known as absolute advantage in economics. It’s a crucial idea in the area of global trade and significantly affects the world market.
History
Scottish economist Adam Smith popularized the idea of absolute advantage in his 1776 book “The Wealth of Nations.” Smith presented the argument in his book “The Wealth of Nations” that nations should focus on producing the commodities and services in which they have a distinct advantage and then trade with other nations for those in which they have a relative disadvantage. Smith predicted that this specialization would boost productivity and efficiency, raising overall national wealth.
Affects on the market
The market can be significantly impacted by absolute advantage. A nation or company may manufacture goods and services more effectively when it has an absolute advantage, which lowers the cost and increases the availability of the goods and services. The company or nation with the absolute edge may therefore see higher earnings as a result of increasing demand for these products and services. On the other side, nations or businesses without an absolute edge would find it difficult to compete, which could result in a decline in the demand for their goods and services, a reduction in profits, and even bankruptcy.
How to calculate it
It must assess the productivity of two nations or businesses producing the same good or service in order to determine absolute advantage. Comparing the amount of a good or service that each country or company can produce in a certain amount of time with the same number of resources is necessary to determine absolute advantage.
Example: Two countries, Country A and Country B, produce shirts. The following table shows the quantity of shirts produced by each country using the same amount of resources:
| Country | Quantity of shirts produced | Quantity of resources used |
|---|---|---|
| A | 100 shirts | 10 units of resources |
| B | 80 shirts | 12 units of resources |
1.First begin by dividing the number of shirts produced by the number of materials utilized
2.According to Country A, 100 shirts divided by 10 units of resources is 10 shirts per resource.
80 shirts divided by 12 units of resources in Country B equals 6.67 shirts per resource.
3.The productivity of each nation is then compared by dividing Country A’s productivity by Country B’s productivity
4.10 shirts per unit of resources divided by 6.67 shirts per unit of resources gives Country A an absolute advantage of 1.49.
5. It follows that Country A has an absolute advantage over Country B in making shirts since the absolute advantage is bigger than 1 (1.49). Accordingly, Country A can create the same number of shirts as Country B but using fewer resources.
But it’s important to remember that this example makes no assumptions about future developments in technology, access to resources, or market dynamics, all of which could influence a country or company’s comparative advantage.
Current examples
The manufacture of textiles is a prime example in absolute advantage. Bangladesh, a nation with cheap labor costs, may have a distinct edge over other nations in the production of textiles. Bangladesh can make textiles for less money than other nations. High-tech gadgets made in nations like South Korea and Japan are another example. These nations’ advanced technology and highly skilled labor provide them a distinct advantage in the production of electronics.
Pros
Increased Efficiency: Absolute advantage enables nations and businesses to produce goods and services more successfully, which lowers costs and increases profits.
Trade stimulation: Absolute advantage might result in more trade between nations since each one focuses on manufacturing the commodities and services where it excels.
Growing wealth: Absolute advantage can increase the wealth of nations and businesses because it enables them to create goods and services more profitably and successfully.
Greater Accessibility of Goods and Services: With absolute advantage, nations and businesses are able to produce more goods and services, increasing consumer access to them.
Examples
Bangladesh, a nation with cheap labor costs that enables it to produce textiles more effectively and efficiently than other nations, may have a distinct advantage in the production of textiles.
Due to their cutting-edge technology and highly skilled labor force, South Korea and Japan have a clear advantage in the production of high-tech devices.
Cons
Increased Competition: When there is more competition, it can be challenging for nations and businesses without absolute advantages to compete.
Reduced Earnings for Nations and Companies Without Absolute Advantage: Nations and companies without absolute advantage might find it difficult to compete, which would result in a decline in demand for their products and services as well as a reduction in profits.
Reduced Diversity in the Global Market: As nations and businesses concentrate on producing products and services in which they have an advantage, absolute advantage can result in a decrease in the diversity of goods and services in the global market.
How to stop it
Because absolute advantage is the product of market dynamics and comparative advantages, it can be challenging to overcome. There are several techniques that can be utilized to lessen its effects, though. For instance, governments can enact laws and rules to level the playing field for businesses and nations. Tariffs, subsidies, and other trade restrictions may be included in these policies to lessen the competitive advantage of businesses and nations having an absolute competitive edge.
Conclusion
The concept of absolute advantage is crucial to economics and has a big impact on the world market. While it may increase production and efficiency, it may also cause countries or businesses without an absolute advantage to lose money or even go bankrupt. Governments can reduce the competitive advantage of companies and nations with an absolute edge by adopting policies and regulations.