Absolute Advantage Definition, Importance, Example & Overview

Posted in Marketing and Strategy Terms, Total Reads: 2368

Definition: Absolute Advantage

Absolute advantage is the capability of any country, firm or a person to produce certain units of product in lesser amount of inputs which gives an advantage over its competitors. Absolute advantage is a scenario when an individual, organization or country can produce a commodity or service using lesser inputs than its counterpart.

Scottish economist Adam Smith in 1776 gave the theory of ‘absolute advantage’ which was later understood and modified as per the modern times. It simply states that certain countries, organizations, firms or people have an intrinsic ability to produce a given amount of good or service using lesser input than their competitors. Absolute advantage is often achieved due to several factors such as availability of abundant resources, high skilled low-cost labor, high learning curve and expertise to produce a product or simply a technological advancement or better R&D facilities. 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.

Importance of Absolute Advantage

Gaining absolute advantage enables any producer to maintain a constant supply of its products as per the demands of the market. It provides relevant cost leadership or quality leadership or in some cases, both. It is rather imperative for any producer to attempt in gaining an Absolute Advantage to ensure substantial market share, global trade (if applicable) and strengthen the producer margins. 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.

Difference between Absolute Advantage & Comparative Advantage

However, it is not essential that absolute advantage always ensures the market leadership of a producer. Often it is observed that although resources are abundant but harnessing them requires a certain opportunity cost. Also, owing to the dynamic nature of production policies such as environmental factors, governmental regulations and alike, it becomes quite complex to use each and every factor of production to the producer’s advantage. This gives rise to the comparative nature of production known as the comparative advantage of product.

Example of Absolute Advantage

Some examples of absolute advantage are:

1. Let us consider a simple case of production of cotton in India and other countries. Considering the soil quality, abundant water supply and cheap labor, India is the world’s leading producer of cotton since many years and hence these factors of production give India an absolute advantage in cotton production.

2. 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.

3. 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.

Hence, this concludes the definition of Absolute Advantage along with its overview.

Browse the definition and meaning of more terms similar to Absolute Advantage. The Management Dictionary covers over 7000 business concepts from 6 categories. This definition and concept has been researched & authored by our Business Concepts Team members.

Search & Explore : Management Dictionary

Share this Page on:
Facebook ShareTweetShare on Linkedin