This is the basic benchmark of performance in economic. If an individual, organization or any nation can come up with more produce using the same amount of input and resolute than only they can enjoy absolute advantage over other producing the same product. Being an expert over a procedure or anything does not imply that working in the same method is the most efficient way to utilize your scares resources. The queries or the question, which arises of, what to master in—and how to boost benefits from global trading—is best depicted within comparative advantage. Over time, however, both comparative and absolute advantages may be subject to change (Absolute advantage).
Origin of the theory Of Absolute Advantage
In the book, the wealth of nations, Adam smith predicted that, within the free trade, every single country should master in production of only those particular products which they can produce in a better way. These goods will entail them to buy goods produced by other countries producing in which they are more effective.
Smith was of sound criticism of the scare of comparison between house hold unit and that of a country. Since every single household unit finds it easier and effective to grow only what they require and to purchase others produce with the products it can sell, the very same concept applies to the countries or nations.
It is a norm for every head of the house, never to grow up any produce whose cost will exceed over the cost from which he can purchase. The tailor will always buy shoes from a shoe seller, who is more efficient in making shoes rather than trying himself to make his own shoe. What is more practical in the approach of every individual family can scarce be foolishness in that of any great nation. If any other country can export a product that is required for the industry or work, it can be managed in a way that it leads to our advantage.
The supposition that counties are quite champion in production of goods or services leads to being its trading partner; this is what theory of absolute advantage is composed of. Absolute advantage, Smith in his illustration showed that trade is in the benefit of countries (Barnat).
World Economies Absolute Advantage
If a country can produce and or manufacture a certain intimate or service using fewer real resources than another country, it is said to have an absolute advantage over that country. Homogeneously the country can generate more output utilizing the same amount of input. The concept of absolute advantage can be implied on a number of different entities which may include areas, cities, firms or even certain regions, but always more attention is found to be given to countries especially with respect to their international trade dealings. The idea of equation cost advantages with the absolute advantage concept has always created bewilderment.
The mercantilist literature that came into the scene in 17th century, which supported the national laws of trade and business to enhance development and money, witnessed a reaction in the face of a doctrine of free trade which materialized towards the end of the 18th century. It concluded Adam Smith’s work, The Wealth of Nations. Smith’s point of view on the topic can hence be summarized as below.
Firstly, he clarifies that certain laws and regulations prevailing for one industry can overrule the importance the same real resources might have brought from another industry. This is called the opportunity cost. Secondly, he emphasized that the opportunity cost standard can also be implied on the individuals living in a society. A particularly clear example of this can be that a baker will not make himself dinner on his own; instead, he will go and buy food from a chef or nearby restaurant that can produce food more efficiently. This shows that every individual and or company will concentrate on the production and manufacturing of a commodity that they are best in. Thirdly, the exactly similar standards of opportunity costs and specialism should be implemented in the international world trade too. For instance, it is always better to import things that other countries can make more efficiently and export goods that they cannot make as efficiently as the first country (Marrewijk).
Obstacles and Limits
There are many warnings regarding to the preceding examination, some of which can be discussed. Absence of absolute advantage; for example if one country possesses an absolute advantage in the manufacturing of a certain moral and the other country in the manufacturing of some other merchandise, then it is recurrently questioned that third world nations might not even possess the required technology to achieve an absolute advantage. This scenario is such that it is not feasible for these countries to try to win the battle in the international market and gain advantage from liberated trade.
In the light of the model of comparative advantage prepared by David Ricardo, this outcome stands nullified. David’s model gives emphasis to manual labor as the chief aspect for primary manufacturing and relates its costs and benefits of business to the dissimilarity in opportunity costs between any two countries. This is so because technologically under-developed countries can certainly try to win in the international trade fair with their cheap labor availability. Hence it can be concluded in the light of this analysis that absolute advantage is neither essential nor an adequate condition or participating in international trade (Marrewijk).
Comparative advantage versus absolute advantage
The concept of absolute advantage is considered when a number of products are taken into count. If for instance, A has an advantage over B in manufacturing C and A has advantage over B in manufacturing D, then it can be said that A has an absolute advantage over B, in terms of merchandise C and D. Consider an assert that say India has an absolute economic advantage over the UK. This statement is strange for two reasons. First, an absolute economic advantage refers to all goods and services of a country. Secondly, the ever increasing cost in a certain industry are troublesome for the businessman in that line of trade, and augmenting costs in the country over all are troublesome for the entire country. But again this is not the major subject. The main topic of debate is the notion of comparative advantage, which materializes when, taking notice of trade. At a first look, no one can justify any reason for A, having an absolute advantage over B in products C and D, would deal with B in these two products. An additional thing to be concerned is; if B starts trade with A in either merchandise C or D, it might harm the wellbeing of A. These preliminary thoughts are totally busted when the nature of business is considered in light of Ricardo’s theory of comparative advantage (Guillory).
Economics is essentially a social discipline with the objective of understanding the functioning of the real-world economy. It can also be said as something that cannot be observed by any one individual fully. Every one of us involve in the economy and trade dealing every now and then, selling and buying goods, but still the whole economy cannot be scrutinized at a given point in time.
Consequently economists have worked out not only new theories, but mathematical models as well to portray the multiple features of the real world (Suranovic).
Having understood the realm of economics, let us now have a look at the term absolute advantage in the light of classical country based theories.
Conventional Nation Based Theories
In 2006 international merchandise trade in goods was $8 tr. & in services $3 tr. (20% of the world GDP). In the domestic economy exports spark, additional economic activity as companies of the country can increase their sales and profits by selling to international markets. Domestic economy is pressurized by imports as foreign products overflow domestic markets and result in shutting down of non-competitive local businesses.
Few countries are experts in exporting manufactured and non-manufactured products. On the other hand, there are some countries that haven’t been so successful and hence have remained poor.
Theory of Absolute Advantage
Let us assume that what will be the scenario if a country has an absolute advantage in everything it possesses and produces. This can be true for large countries like China or the United States of America. They can have an absolute advantage in manufacturing multiple kinds of products. Though certainly the degree of value adds and returns will differ product to product and industry to industry. Certainly certain products allow for higher profit margins than other products. This poses a definite question for countries to either focus on products with higher profit margins or focus on all available products equally.