The absolute advantage is the ability of a person, company or country to produce a good, having to use fewer production factors than another.
In other words, the absolute advantage tells us that one country better than others in the production of a good or service. It offers higher quality at a lower cost. By having better resources such as technology, time, capital or better human factor, something can be produced more efficiently . This means that this measurement can be used when making comparisons between different producers.
In this way, we can compare nations, companies or individuals according to their expenditure of resources when producing a good. The one that uses fewer resources to carry out this action, we will say that it has an absolute advantage.
The absolute advantage of Adam Smith
This economic concept is one of the first bases in the study of economics and international trade , since Adam Smith announced his theory. For Smith, countries tend to specialize in the production of those goods in which they have an absolute advantage. This happens due to the lower expenditure of resources in production that was mentioned above.
According to the theory of absolute advantage , as countries specialize in the goods in which they have absolute advantage, they export those goods and with the proceeds of this sale they buy other goods produced by other countries. In this way he reached the conclusion of the efficiency of international trade.
However, the idea of absolute advantage as an engine of international trade turned out to be too simplistic for reality. Since there were cases in which according to the definition given, trade could not occur.
To give a simple example: if country A produces food for 5 euros and clothes for 6 euros, while country B is engaged in the production of food for 10 and clothes for 12, there would be no trade between them according to the theory of the absolute advantage. This would happen because country A has an absolute advantage in both products and would not be interested in acquiring either from country B.
In this way, it was arrived at through the study that international trade does not strictly respond to the theory of absolute advantage, but to that of comparative advantage .
The Absolute Advantage and the Comparative and Competitive Advantages.
International trade theories attempt to explain why countries trade with each other, what kinds of goods they exchange, and at what price. Below we will briefly summarize the main theories and their suitability for today’s economy.
At the end of the 18th century, Adam Smith, in his work The Wealth of Nations , formulated the theory of Absolute Advantage , which constitutes the first theoretical explanation of international trade. According to her, if there were no trade barriers, each country would specialize in those products in which it had an absolute advantage over other countries. A concentrating productive resources, economies of scale and appear therefore allow international specialization lower cost or s and greater well – being for all participants in trade.
Example: If producing a unit of food costs 1 unit of labor in country A and 2 units in country B, and if producing a unit of cloth costs 4 units of labor in country A and 3 in country B, then both countries can win by trading.
| Food | Fabrics | |
| Country A | one | 4 |
| Country B | two | 3 |
If the two countries exchanged the two goods in the ratio of two units of food for one of cloth, country A could get one unit of cloth for two of food instead of four. And country B would get, for each unit of cloth, two units of food instead of one and a half without trade.
It is clear that even today this theory is still valid, since industries are efficient to the extent that production factors can be obtained using low cost or .
In 1817, David Ricardo, another English classical economist, in his work The Principles of Political Economy and Taxation , deepens and completes the previous theory in the sense that, even if one country has an absolute advantage over another in the production of two goods, There may be advantages to specialization, since, in relative terms, its advantage may be greater in one good than in the other. It is the theory of comparative advantage, which tells us that each country should specialize in those goods in whose production it has a greater relative advantage.
Let’s look at the following table as an example:
| Food | Fabrics | |
| Country A | one | two |
| Country B | 3 | 3 |
It follows from this table that country A has an absolute advantage in the production of both goods. But the relative prices are different and this is what will drive the trade. When there is no exchange, fabrics are relatively cheaper in country B, one (3/3) unit of food for each unit of cloth, than in country A, two (2/1) units of food for each unit of cloth. The opposite occurs with food. In country A the relative price is half (½) unit of cloth for each unit of food, while in country B the relative price is one (3/3) unit of cloth for each unit of food.
At the beginning of the exchange, food sellers in country B will begin to import food from country A, in exchange for manufactures from country B in which sellers from country A will be interested as these are relatively more expensive in this country. For this flow to take place, it must be carried out under conditions that are favorable for both, that is, a relationship of exchange between food and cloth between ½ and 1. Said relationship must be greater than ½ for country A finds the exchange favorable and less than 1 so that it is also favorable for country B. With a relative price between the two, each of the countries will specialize in the good that produces more efficiently, and will import those goods that produce less efficiently. efficient.
The theory of V entaja C omparativa proves that free trade improves the allocation of resources and always leads to more efficient outcomes and, ultimately, greater well – being. In this sense, the decline and even the disappearance of some uncompetitive sectors as a consequence of the liberalization of imports is justified on many occasions by an unfavorable economic framework (inflation, high wage levels, public deficit, etc.) or even by poor business management. Comparative Advantage, as opposed to Competitive Advantage
, is among the oldest terms in economic studies. The importance of being clear about what distinguishes each of these terms becomes clear when, for example, “competitiveness”is widely used by governments to largely justify their economic policies without sometimes reflecting what the term itself entails.
Michael E. Porter in his work “Competitive Advantage. Creating and Sustaining Superior Performance” defines Competitive Advantage as the profit that a company is capable of generating for its clients. This translates into lower production prices obtaining benefits similar to those of competing companies. This “profit is defined as the amount that customers are willing to pay for the products of a company, that is, the” value “, always according to Porter. If this” value “is higher than the production costs, it is said that the product is competitive, that is, the greater the ability of a company to transform investment costs and labor costs, that is, inputs, into profits, the more competitive the company will be.
In our times it is said that a country should stop competing on comparative advantages and compete on competitive advantages that arise from unique products. It is sought that there is a higher degree of competitiveness based on the specialization of the workforce and production processes that are based on new technologies to increase their efficiency. In this way, dependence on excessively cheap labor is stopped and the optimization of resources is promoted, generating higher quality products that are equally competitive within international markets and, in turn, encouraging the development of technological innovations.
Despite this, economists assure that these two terms are not independent in any way and that they are linked to each other, since in reality competitive advantage is built on comparative advantage and the factors that determine it, and sometimes production costs are so high that it is not feasible to carry out projects that can simultaneously obtain a competitive advantage over the production of these products in another country.