Posted in Marketing and Strategy Terms, Total Reads: 153
Definition: Absolute Advantage
Absolute advantage is a scenario when an individual, organization or country can produce a commodity or service using lesser inputs than its counterpart. Different countries have different resources; hence it is logical that different countries are better at producing different things.
It was initially proposed by the UK financial expert Adam Smith with respect to countries producing one goods or services over other for foreign trade.
Having absolute advantage doesn’t necessarily implies the goods or services should be produced. In some cases, it can be difficult owing to complex input factors. Also it should be economically feasible and profitable. Hence relative advantage should be taken into consideration. This is called comparative advantage which is ability of an individual, organization or country to produce a particular good or service at a lesser opportunity cost. Imports and exports take place due to this concept of absolute and comparative advantage.
Following example will clear any ambiguity-
We know labour is cheap in India as compared to western countries. Hence, if say, a car is made in India using the same technology and inputs, the production cost will be lower as compared to US because of cheap labour. Hence, India has absolute advantage in production of car over US. Because of cheap labour most of the outsourcing is done to India.
Another real life example is Chinese mobiles with same configuration are cheaper than other international brands. Hence Chinese mobiles have absolute advantage over other phones.