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Absolute Advantage Example
When producing goods, there are some situations where an absolute advantage is critical. For example, if two countries are equally good at making cars, but Japan produces better quality cars faster, they have an absolute advantage in car production.
This absolute advantage influences how the two countries produce and import goods. Similarly, if one country is better at producing chairs than another, they would have an absolute advantage.
Producing Chairs
Consider a situation where the US produces twice as many chairs as Canada. Both countries produce roughly the same television sets, but the US produces twice as many chairs per worker. Even though the US produces twice as many chairs as Canada, its comparative advantage in chairs is less than one percent.
This is due to the difference in the opportunity costs of the two products. However, both countries can take advantage of their low opportunity costs by enjoying lower product prices and trade surpluses for other countries’ goods.
In addition, the cost of producing tables is lower than that of making chairs. For example, the EF has a lower opportunity cost to pay for chairs than the WF because it can specialize in tables. While Western Furnishers can produce up to forty tables per day, Eastern Furnishing can only produce twenty.
Another example of comparative advantage is when a country produces three times as many tables as Factory A. This advantage means that Factory A should focus on producing tables, while Factory B should focus on producing chairs. Countries with comparative advantages focus on products with lower opportunity costs and higher profit margins.
Producing Tables
Producing tables and chairs can be an example where a country enjoys an absolute advantage in a specific industry. For example, if a country produces six tubs of butter and two slabs of bacon, it can produce more tables and chairs than its competitors. If the United States produces ten tables per day, then the same country can produce more chairs per day, and so on.
Another example is the difference between relative and absolute advantage. Absolute advantage is a company’s ability to produce a product with higher efficiency and lower costs than competitors.
For example, if John can manufacture a table in two hours and Shirley can make one in three, the former has an absolute advantage.
While this advantage may be easier to determine in a superficial industry, it is much more challenging to measure in a more complex industry.
In the same example, a factory with an absolute advantage in producing tables and chairs can produce three times more tables than Factory A.
Thus, it makes more sense for Factory B to focus on producing tables and chairs. Comparative advantage, on the other hand, focuses on lowering opportunity costs and maximizing profit margins.
Producing Wine
A country may have an absolute advantage over a country with a lower opportunity cost of producing wine. This is true when the country produces both wine and dairy products. However, the two countries must have a comparative advantage in the other good.
For example, if Italy is better at producing wine than Australia, then the country has an absolute advantage in the production of wine.
Portugal produces wine cheaper than England. The opportunity cost of producing one unit of wine in Portugal is two units of wheat.
This means England would have to sacrifice two units of wheat to produce one unit of wine. Portugal would have a cheaper opportunity cost of producing one unit of wine. However, Portugal is a much better producer of wine than England.
The globalization of wine production has transformed the industry in many ways. It has changed international trade patterns and led to the entry of newcomers, like Chile and Australia.
These countries have low labor costs and can therefore compete with European producers in wine export markets.
This has forced the leading European wine-makers to compete with the international wine enterprise. This situation has caused the price of wine to fluctuate widely.
Another absolute advantage example of producing wine involves comparing the production of wine and cloth in two different countries. For instance, in England, 100 men can produce a given amount of cloth in a year, while it takes a hundred men a year to produce the same amount of wine in Portugal.
Producing Coffee
Using the example of coffee, a country that produces more coffee per unit of labor than another will have an absolute advantage in producing that product. Differences in geography would cause this advantage.
While France has an absolute advantage in sweater production, it also has a comparative advantage in producing wine. This means that France requires less labor per unit of product. This kind of advantage would lead to gains from trade.
In the case of coffee, for example, a country could produce twice as much coffee as another country, while the country with fewer resources would have a smaller production.
However, the countries with more resources would have a lower absolute advantage. However, this example is not universal. In many industries, the same product is produced by more than one country.
Producing Garments
If a country is better at producing a particular good, it has a clear advantage over its competitors. In the case of producing garments, Bangladesh has a lower labor cost and a thriving network of supporting industries.
As such, the country can supply raw materials and intermediate products to garment manufacturers in other countries. According to Adam Smith, countries should specialize in areas with an absolute advantage. By focusing on one sound, a country can trade with other countries and increase its output and economic welfare.
For example, a country with an absolute advantage in banana production has a lower opportunity cost than the U.S. economy. The country can produce two times as much food with the same amount of inputs. Therefore, a country with an absolute advantage in banana production has a distinct advantage in food and clothing manufacturing.