Absolute Advantage Example (Considerations and FAQs)

By Indeed Editorial Team

Published May 28, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Absolute advantage is a technique that helps entrepreneurs identify a company or business' strengths. Because of its numerous benefits, various professionals employ absolute advantage for delegating workplace assignments or for foreign exchange protocols. Understanding this technique can give you in-depth knowledge of what absolute advantage is and how to employ it successfully. In this article, we discuss what absolute advantage is, identify factors that influence absolute advantage, explore differences between absolute and comparative advantage, answer FAQs about absolute advantage, and provide examples of absolute advantage.

What is absolute advantage?

Absolute advantage is an economic concept that occurs when a company develops and distributes the same goods as another using fewer assets. The concept refers to an entity's production level, and how its access to more resources can ensure its design and manufacturing processes are efficient. Absolute advantage is helpful in international trade, especially between organizations exchanging goods that they have an advantage over within an industry. This is because both institutions can gain goods they were previously unable to access.

Related: How to Calculate the Cost of Goods Manufactured (COGM)

Absolute advantage examples

Here are some absolute advantage examples to consider:

Example 1

Two e-commerce organizations allow consumers to sell and purchase goods online. Company A provides free overnight shipping, and it has warehouses throughout the country and 5,000 employees to deliver parcels to the customers' houses. Company B has one warehouse and 1000 employees, so it ships packages after four business days. The businesses offer the same goods at the same prices. Still, company A has an absolute advantage over Company B as it can service its customers faster.

Example 2

Country A has a comprehensive mining industry, and its geographic location enables professionals to recover coal from under the earth's surface. The country's excellent conditions for mining offer an absolute advantage for coal access over other countries. Consequently, Country A trades coal during the international exchanges to receive other resources like corn. Country B has rich farmlands that enable excellent corn growth, providing an absolute advantage. Despite this, there's a minor demand for mining, and Country B has low coal supplies. Both countries implement an international exchange, exchanging corn and coal and gaining previously inaccessible resources.

Example 3

A furniture shop in a small city specializes in handcrafted wooden furniture, including chairs, tables, and dressers. It commonly takes the staff 12 hours to make each new piece. A competing furniture outfit also creates and sells wooden furniture at the same price and size, but its staff can fulfil customers' requests in six hours. The faster production and delivery time gives the competing store an absolute advantage over the other furniture store.

Example 4

A white flower blooms in a Southern city during spring and is a popular choice for spring wedding decorations. Still, the flower only grows in a part of the province, causing vendors in other locations to import the flowers when they require them. This constitutes a lengthy process as they fulfil clients' requirements. The florists and vendors in the southern city gain an absolute advantage over their non-southern competitors as they're within close proximity to the flowers. This makes it easier to offer them to their customers quickly.

Related: Relationship and Effect of Customer Service in Sales

Example 5

A team of content writers develops blog posts for a client at a public relations agency. The goals include conducting research regarding the topic, writing no more than 500 words, and proofreading the result for errors. Jerry can write and publish five articles per workday, while Kathy can complete seven articles. Tonia can complete nine articles in a workday, earning the absolute advantage against her team members. She can meet the same expectations for the same customers as Jerry and Kathy and finish the tasks with greater productivity.

Factors that affect absolute advantage

Here are some factors that affect absolute advantage:

Geography

A company's global location can offer it close proximity to natural resources, giving it an absolute advantage over other nations with less desirable proximity. For example, companies in the middle east can mine and produce oil faster and more cost-effectively than those in North America. This consequently grants these companies an absolute advantage.

Technology

Advanced technology can allow professionals in an entity to manufacture goods more quickly than its competitors. Companies can have equipment that processes and packages goods more efficiently than employees can by hand. This allows the company to turn out more high-quality goods than its competitors in less time.

Related: 10 Technology Careers (With Salaries and Primary Duties)

Wealth

Countries or companies with high-income levels can assign more financial resources towards manufacturing goods or offering services. They can typically leverage this wealth to develop technology or hire more professionals as a result. This grants such a country or company an absolute advantage over the competition with less wealth.

Education

Access to quality education can enable employees to learn technical skills, which they can employ to manufacture products. For example, skilled staff can streamline manufacturing for a company, granting an absolute advantage over a company with employees possessing different expertise. The education can also teach the employees to adopt various channels of distribution or production theories that improve their efficiency.

Differences between comparative and absolute advantage

While absolute advantage and comparative advantage are both economic concepts, they're different measures of advantage. Here are the two primary differences between them:

Ability

Countries, companies, or individuals with an absolute advantage possess a different ability than if they possessed a comparative advantage. This is because a business can develop the same asset faster than competitors with an absolute advantage. In contrast, comparative advantage involves a business' skill to create a product at a lower opportunity cost.

For example, a tech company develops applications for computers and mobile devices, but it can't develop both applications simultaneously. The managers consequently decide to focus on computer applications first. The company can develop five computer programs or 10 mobile programs, meaning the opportunity cost of developing one computer program is two mobile programs. If the cost is less than that of competitors, the technology company has a comparative advantage.

Dependence

Another primary variation between comparative and absolute advantage is their reliability on the other. Comparative advantage complements absolute advantage to offer benefits to an international exchange to a business. For example, where an organization or country has multiple absolute advantages over its counterparts, the parties involved may focus on the comparative advantage. This is instead of depending on the singular entity to provide assets to the rest of the world.

Related: Teamwork Skills: Definition and Examples

Frequently asked questions about absolute advantage

Here are answers to some frequently asked questions regarding the absolute advantage:

What are the advantages of absolute advantage?

One significant benefit of absolute advantage is that it enables businesses or employees to focus on a specific duty where they're more productive. Specialization can lead to task delegation in a workplace, increasing efficiency. For example, a fast-food outfit has five employees working simultaneously, and the manager learns that each employee possesses an absolute advantage in finishing an assignment. The manager assigns an employee to note customers' orders and another to make beverages instead of requiring the employees to do every task. The other three employees either cook fries or prepare burgers.

What are the challenges with absolute advantage?

Absolute advantage also has various challenges, especially regarding foreign exchanges. A primary limitation is that it can affect supply and demand. This is because depending on a company to manufacture a resource can have the supply outweighs the demand. Such a company subsequently has a surplus of products that are no longer profitable.

Another challenge with an absolute advantage in international trade is that it relies on nations' relationships with each another. It may be difficult to agree regarding an exchange if the parties don't have an alliance. Still, countries and companies can discuss foreign trades by employing their absolute advantage and demonstrating the benefits to the other party.

Can I calculate the absolute advantage?

This process begins with determining the good's production cost. Calculate the cost of gathering materials to develop a product or offer a service, which is the input. For example, the inputs for building a bike may cost $2500 to purchase the parts. Afterwards, identify the earning potential of manufacturing the goods. This involves determining the amount you can make with the chosen inputs. Making this determination is essential as it helps you estimate the total production cost.

Finally, compare earning potentials between two entities. It's essential to determine who's more productive when developing a product by comparing it with a counterpart if you use the same inputs. The party with more productivity has the absolute advantage.

Related: A Guide to Sustainable Competitive Advantage in Business

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