Definition
Absolute Advantage
Absolute advantage is the ability to produce a good using fewer resources than another producer; it differs from comparative advantage, which is based on opportunity cost.
A country has absolute advantage when it can make more of a good with the same inputs. Adam Smith used it to argue for specialisation, but it doesn't fully explain trade.
Ricardo showed that even a country with absolute advantage in everything still benefits from trade by specialising where its comparative advantage (lowest opportunity cost) lies. This distinction is why a highly productive economy still imports goods from less productive partners.
Related terms
- Trade DeficitA trade deficit occurs when the value of a country's goods imports exceeds its goods exports, forming a major part of the current account.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Terms of TradeTerms of trade is the ratio of a country's export prices to its import prices; rising terms of trade mean exports buy more imports, improving national income.
- Opportunity CostOpportunity cost is the value of the next-best alternative you give up when you choose to use money (or time) one way rather than another.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.