What is an absolute advantage?

An absolute advantage is achieved through low-cost production. In other words, it refers to an individual, company, or country that can produce at a lower marginal cost. Such an advantage is established when (compared to competitors): Absolute cost advantage results from the specialization of labor proposed by Smith in his theory.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage is concerned with producing at a lower cost. Comparative advantage is concerned with producing at a lower opportunity cost (ie. relatively better at producing) Having absolute advantage doesn’t necessarily mean an economy should produce that good. It is not advisable to try and produce everything.

What is absolute advantage theory?

The ability to produce a good or service at a lower opportunity cost. The Absolute Advantage Theory assumed that only bilateral trade could take place between nations and only in two commodities that are to be exchanged. Such an assumption was significantly challenged when the trade, as well as the needs of nations, started increasing.