Absolute advantage
Absolute advantage: Principle of Absolute Advantage
Absolute advantage: Complications and Limitations
Absolute advantage: Income, and Wages
A country is said to have an absolute advantage over another country in the production of a good or service if it can produce that good or service (the "output") using fewer real resources (like capital or labor, the "inputs"). Equivalently, using the same inputs, the country can produce more output. The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows. The fallacy of equating absolute advantages with cost advantages is a never-ending source of confusion. Deviations between the two are caused by the fact that real resources may receive different remunerations in different countries.
In reaction to the mercantilist literature of the 17th century (which advocated state regulation of trade to promote wealth and growth), a doctrine of free trade emerged at the end of the 18th century, culminating in 1776 in Adam Smith’s masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations. Drawing on the work of others, Smith was able to put many different arguments and elements together in a coherent and systematic framework, organized using a few general principles, and thus providing a new way of thinking about political economy (Irwin 1996).Smith thus provided the first analysis of economic reasons for advocating a policy of free trade and, according to Joseph A. Schumpeter (1954, 374), ‘‘seems to have believed that under free trade all goods would be produced where their absolute costs in terms of labor are lowest.’’
Smith’s arguments can be summarized as follows. First, he points out that regulations favoring one industry draw away real resources from another industry, where theymight have been more advantageously employed (opportunity costs). Second, he applies the opportunity cost principle to individuals in a society for example, by pointing out that the tailor does notmake his own shoes (whichwould cost him a lot of time) but buys them from the shoemaker (who can produce them more efficiently). Each individual is therefore specializing in the production of those goods and services in which he or she has some advantage. Third, Smith applies the same principles of opportunity costs and specialization to international commercial policy and nations. It is better to import goods from abroadwhere they can be produced more efficiently, because this allows the importing country to focus production on the goods it can itself produce efficiently. The primary (classical) reason for international trade flows is therefore a difference of technology between exporter and importer.
See also comparative advantage; economies of scale; gains from trade; Heckscher-Ohlin model; intraindustry trade; newtrade theory; revealed comparative advantage; Ricardian model; trade and wages
FURTHER READING
- Irwin, Douglas A. 1996. Against the Tide: An Intellectual History of Free Trade. Princeton,NJ: Princeton Uni versity Press. A magnificent overview of the arguments for and against free trade throughout history.
- Schumpeter, Joseph A. 1954. History of Economic Analysis. 12th printing, 1981. London: Allen andUnwin. Still the history of economic analysis.
- Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by R. H. Campbell and A. S. Skinner. The Glasgow Edition of the Works and Correspondence of Adam Smith 2. Reprint, 1981. In dianapolis, IN: Liberty Press. The starting point of economics as a science, using a coherent system of analysis favoring free trade.
- Trefler, Daniel. 1995. ‘‘The Case of the Missing Trade and Other Mysteries.’’ American Economic Review 85: 1029 46. Ingenious empirical tests of various trade theories with a prominent role for technology differ ences.
CHARLES VAN MARREWIJK