What is Absolute Advantage

Absolute advantage measures the economic performance. If an entry can produce more of something using the same amount of resources and effort, then this entity has an absolute advantage over all other entities which are underperforming.  An entity can be a firm or a country or an individual. There are a lot of ways to utilize the resources.

Amazon as an example

Let’s look at Amazon company. When Amazon did not start its cloud computing business it was using its resources to produce the output which was only driving their specific business, and a lot of resources got wasted. Now Amazon using the same amount of resources for its businesses but all other spare resources are using to drive further economic prosperity. In both cases, the cost of those resources was somewhat similar. But the production in terms of revenue growth is big. So we can say that it has an absolute advantage over other firms whose resources are not smartly utilized.

Cost-per-Unit

There is another way to put the same notion in place. Absolute Advantage is the ability of an entity to make use of its resource in the most appropriate efficient manner that they are producing a fair amount of extra value which others are not producing. There is another parameter which is used to assess absolute advantage. It is called cost-per-unit. The lower cost-per-unit an entity can derive the higher absolute advantage it yields.

Number of inputs

If the entity uses the minimum number of inputs which derive a higher number of production yield as compared to a higher number of inputs, then the same entity has an absolute advantage as well. This input to output ratio dictates prosperity as well. The smaller the ratio is the better. We also term a process as an efficient process if the inputs are lower with a minimized aggregate cost to produce the same or extra output.

In economics, the absolute advantage is mostly coined when comparing countries and their outputs. The notion of this idea was put forward by Adam Smith as part of his division of labour methodology.

Amount of time as an example of an input

Amount of time is a type of an input. E.g. if a country X can produce some product Y in A number of years/months/days and the other country Z can produce the same product Y in B number of years/months/days, where B is less than A, then country Z has an absolute advantage on country X.

Procrastination as a funny and nutty example

Let’s say if a programmer can write a program with the same outputs in 1 hour. And another programmer writes the same program in 10 hours with the same output. And for some nutty reasons the second programmer does check facebook/twitter/youtube/reddit all the time in between writing the code, then we say that former programmer has an absolute advantage on the later one. Here both programmers have the same mental capacity.

Low cost of labour

One such input which is highly important is the low cost of labour in some countries. China, India, Bangladesh, Pakistan, and some other countries have an absolute advantage on some products just because of a low cost of labour. Many organizations who are actually in a no low absolute advantage countries just outsource some product manufacturing in order to achieve higher efficiencies in their own jurisdictions. That is where globalization is making an impactful mark of it.

Products from Amazon.co.uk