Absolute Advantage Absolute vs. Comparative

¶ … Absolute advantage

Absolute vs. Comparative Advantage

According to Paul M. Johnson's Glossary of Economic Terms, an economic entity, whether this be an individual, a household, a firm, or a nation has an absolute advantage over another economic actor to produce a particular good or service when it can produce the item in question "with a smaller total input of economic resources (labor, capital, land, etc.) per unit of output than other economic actors" in the market (Johnson, 2001, "Absolute Advantage"). An example of this might be the United States compared with other nations in regards to corn, which American farmers can produce in inexpensive abundance in the heartland of the nation.

A corporation such as Microsoft has a tremendous absolute advantage in making software over its competitors since it has such vast access to capital and production facilities, it can manufacture items at a great economy of scale. Even an individual who, for example, can run an inherited family pizza business using his or her family as unpaid workers might have an absolute advantage over a similar restaurant in the area starting from scratch because the new restaurant has to build new ovens, hire outside workers, and spend more money on marketing and generating name recognition.

Absolute advantage in terms of the theory of trade and economic specialization is distinguished from comparative advantage as comparative advantage "determines the potential welfare gains from specialization and trade" (Johnson, 2001, "Comparative Advantage"). Comparative advantage means an economic actor can provide a good or service at a lower opportunity cost than competing economic actors. "That is, the economic actor with a comparative advantage can produce the particular good or service by giving up less value in other goods or services that he could otherwise produce with his labor and resources than the other economic actors would have to give up in producing that same good or service.... Note that an economic actor can display a comparative advantage in the production of a particular good even when the other actor happens to have an absolute advantage in producing the same good" (Johnson, 2001, "Comparative Advantage"). "This is because any actor's comparative advantage depends only upon the relationship between that single actor's own levels of productivity for two goods under consideration, while (www.auburn.edu).

An example of the distinction between comparative and absolute advantage might be that Microsoft may have so much capital and available resources that it could produce, say, pizza at an absolute advantage, compared with the local Italian restaurant. But to do so, Microsoft would have to give up some of its resources better spent in the production of a new Windows operating system, from which it could make much more money. Giuseppe, however, down the street, has a comparative advantage making his living producing pizzas at the business he inherited from his father, as he has few start-up costs, and because he can employ all of his family at the business at no cost. Economically, this single proprietor has the least to lose using his particular business space for that particular product, in comparison with Microsoft. Giuseppe would have to give up much more to turn his pizza business into a computer start-up company.