Comparative Advantage and Trade

Absolute Advantage

Absolute advantage describes the circumstances in which a country has the highest productivity or, in other words, requires the least amount of input to produce a unit of output.

An absolute advantage is the ability of one country, group, or individual to engage in a specific economic activity more efficiently than another. It allows comparison of the economic outputs of different countries, businesses, or individuals. An output is a good or service produced by the production process. The producer with the highest level of productivity can be determined by comparing the inputs each needs to produce a unit of output. An input is any resource or factor of the production process needed to create a final product or service. Productivity is an economic measure of output per unit of input, including capital and labor. The producer that can produce one unit of output with the fewest inputs is the most efficient; that producer is said to have an absolute advantage.

Alice and Becca both build clocks and doorframes. Each person uses the exact same raw materials to build the clocks and doorframes, and the final products are of equal quality as well. The only difference between Alice's and Becca's production of clocks and doorframes is the time it takes for each to make the products. It takes Alice 12 hours to build a clock and 6 hours to build a doorframe. It only takes Becca 8 hours to build a clock and 2 hours to build a doorframe. Therefore, Becca has an absolute advantage in the production of both clocks and doorframes because she can produce each in less time, time being one input.

Even though Becca has an absolute advantage, she may still engage in trade with Alice. This is based on the idea of comparative advantage. Becca can focus on producing only doorframes because she is more efficient at their production than Alice. Because Becca has a comparative advantage in making doorframes, she can specialize in the producing doorframes and benefit by trading Alice for her clocks.

Absolute Advantage and Clock and Doorframe Manufacturing

Labor Hours (to produce 1 unit)
Clocks Doorframes
Alice 12 6
Becca 8 2

The concept of absolute advantage allows for the comparison of the economic outputs of different economic agents (individuals, businesses, or countries). The economic agent that can produce one unit of output with the fewest inputs has an absolute advantage. Alice takes 12 hours to build a clock and 6 hours to build a doorframe, while Becca takes only 8 hours to build a clock and 2 hours to build a doorframe. Therefore, Becca has an absolute advantage in the production of both clocks and doorframes.