What Is Absolute Advantage?
The race in progress involves a lot of participation from all sectors and industries. While some may be neck-and-neck in the production of goods and services, others have an unfair and absolute advantage over other producers and competitors.
What is Absolute Advantage?
Absolute Advantage means that an individual, entity, or country can produce greater quantities of goods or services over the others given the same quantity of inputs in the same span of time.
Absolute advantage is also the ability to produce the same quantity of goods and services with a lesser quantity of inputs than another producer or competitor.
Absolute Advantage can also define one that can produce the same goods or services with a lower absolute cost.
The Concept of Absolute Advantage
In 1776, Adam Smith developed the concept of Absolute Advantage in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” showing how countries can gain from trading by focusing on the export of goods that they are efficiently producing more than the other countries.
If countries specialize in particular goods and services that they better at, they can use their gains in purchasing goods and services that their nation lacks.
Adam Smith espouses the thought that if countries so decide to use absolute advantage by pinpointing even one product or service that they naturally produce efficiently more than other countries, it can make all countries better.
Comparative Advantage Compared to Absolute Advantage
Comparative advantage is when a producer’s product or service is lower in opportunity cost compared to another producer.
If a country has no absolute advantage, it can still gain from trade if it can specialize in opportunity costs where its products or services are cheaper.
Benefits of Absolute Advantage
Trading makes sense when Absolute Advantage is applied as any country, company, or individual can sell their goods and services and then use the funds to purchase from another the products and services they need which they are lacking from, or not producing enough. Trading partners can both benefit from this principle. Countries can benefit by maximizing their efficiency and productivity in producing their special product with all resources and labor focused in producing that one product to maximize value.
The disadvantage of Absolute Advantage is that concentrating on a single product can be dangerous and unrealistic for a country to do. Even if a country has Absolute Advantage in the manufacture of a product, the problem arises when that product is not in high demand.
Examples of Countries with an Absolute Advantage
Saudi Arabia is one clear example of a country with an Absolute Advantage. They can easily extract oil compared with other countries. That means the cost of extracting oil is greatly reduced compared with other countries with little oil. That is their Absolute Advantage. Colombia’s Absolute Advantage is its climate which makes it suitable for them to grow a lot of coffee. The world’s richest copper mining is located in Zambia making it their absolute advantage. But Saudi Arabia cannot grow that much coffee so they trade with Colombia. Colombia cannot drill that much oil so it trades with Saudi Arabia. Both countries trade with Zambia for copper while Zambia needs the coffee of Colombia and the oil of Saudi Arabia.
To determine if a country has Absolute Advantage, one must know the cost of inputs in manufacturing the product, and how much gain a country can have using those inputs. Then pit the production capacity of one country to the production capacity of another country, assuming that they both use the same inputs.
In crypto, a coin or token can have Comparative Advantage but not Absolute Advantage over other tokens or coins based on its value and utility as reflected in market price. The high volatility of cryptocurrencies can flip prices in an instant that a once expensive coin or token can be overtaken in value by another. Absolute Advantage is still considered non-existent in the world of cryptocurrencies until all things are considered in the creation, development, production, and use of coins and tokens.
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