Absolute advantage is Basic concepts, principles, theory

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

From the most ancient times, people traded. Initially, between individual settlements, and later - entire regions. With the development of the manufacturing industry and technological revolutions, the production of goods has been greatly simplified. There was a need to develop new foreign markets, the international division of labor and capital. Many philosophers and economists have tried to think about these problems, but Adam Smith was the first to clearly formulate his concept. He was the first to define the concept of absolute advantage. This gave impetus to the development of other concepts. For example, such as comparative advantage. It later formed the basis of the famous Heckscher-Ohlin theory and Porter's theory of competitive advantage. The new theory of A. Smith laid the foundation for the study of international trade and gave the key to understanding the principles of international competition.

The concept of absolute advantage

The term is used in the analysis of the causes of international trade and the principles of economicinteractions between countries. In economics, an absolute advantage is the ability of one organization, entrepreneur, or country to produce public goods (goods or services) in greater volumes than others. At the same time, spending the same amount of production resources. The effectiveness of the absolute advantage is evaluated with the help of commodity benefits. Each trade entity, be it an enterprise or a country, seeks to develop its advantages - this is one of the fundamental principles of the economy.

Factors

Any advantage is based on the possession of certain advantages by the trader. Such as:

• uniqueness of the climate;
• large reserves of natural resources;
• large workforce.

Having one single absolute advantage is an opportunity for a trading entity to become a de facto monopolist of its industry in a certain region. If it is "in the hands" of one country, it automatically gives the right to obtain international specialization in the global market in one of the trade areas.

A. Smith's theory

"Pioneer" in the study of absolute advantages is Adam Smith. In one of his works on economics, An Inquiry into the Nature and Causes of the We alth of Nations, he was one of the first to suggest that the real we alth of every country lies in the goods and services that are available to citizens. He suggested that a country has an advantage over other countries if it has sufficient humanresources, special natural conditions and raw materials for the production of goods. This allows it to produce cheaper goods on the international market compared to competing countries.

Smith believed that in a global market it is beneficial for countries to purchase goods from other countries that have an advantage. At the same time to develop their advantages over other countries. For example, it is profitable for Russia to sell gas and buy coffee from Brazil. Since our country has an absolute advantage in the trade of raw materials, it is beneficial for all other countries to purchase gas from Russia. But growing coffee in Russia is almost impossible. But the climatic conditions of Brazil allow it to use its absolute advantage in the export of coffee beans. It follows from this that it is more profitable for our country to buy coffee in Brazil.

Ways for countries to benefit

In the theory of A. Smith there are two ways:

• Labor intensity - cheap production of products. For measurement, they take time costs per unit of goods produced.
• High productivity demonstrated when creating a product in one country compared to another. It is taken into account as the amount of goods produced per unit of time.

Ricardo's Theory of Comparative Advantage

The main flaw in Smith's theory of absolute advantages is the lack of explanation for the participation in global trade of countries that do not have any "merits". This condition was taken into account in his theory by DavidRicardo.

In his work "The Beginning of Political Economy and Taxation", the author considers a situation in which a certain country A has absolute advantages in the production of all goods, and compared it with country B, which does not have absolute advantages.

As a result, Ricardo concluded that country B should analyze all its advantages and choose a certain product for participation in international trade. Which has the smallest lag in production efficiency from the goods produced in country A. This is called the smallest relative (comparative) advantage, and it differs from the absolute by the degree of production costs of the goods.

Besides this, Ricardo singles out the second category of comparative "dignity". If country A has an absolute advantage in the production of some good T due to speed (twice as fast as country B), and 3 times faster than country B produces good T2. Then country B should produce good A, since the gap in production efficiency between goods between countries is lower. This phenomenon is called the greatest relative advantage, and it is distinguished from the absolute advantage by the smallest difference in the speed of production of goods.

"Dignity" of Russia

As of 2017-2018, Russia ranks 11th in the global ranking of exporters. High performance allows to achieve a number of absolute advantages that the country has.

1. Gas. Russia is the largest international supplier of blue fuel, ahead of Qatar and Norway in terms of production and sales.
2. Oil and refined products. The Russian Federation is the largest producer and supplier of oil throughout the European territory at a relatively low cost. This gives it an absolute advantage over other countries.
3. Diamonds. Our country is the world's largest supplier of rough diamonds.
4. Heavy and non-ferrous metals. A number of Russian metal mining enterprises are the world's largest suppliers of raw materials.
5. Wood. Russia is the leader in the supply of cheap timber (industrial roundwood) of the Northern Belt, ahead of New Zealand, the USA and Canada in these indicators.
6. Armament. It cannot be said that Russia supplies the most weapons in the world. This is not true, but Russia has a clear advantage in certain types of weapons.
7. Power plants and nuclear fuel. In this market, Russia is close to monopoly. Therefore, some economists debate whether the advantage in this industry is absolute or relative due to lack of competition.

Porter's Theory

The concept of a country's absolute advantage laid the foundation for the development of other economic theories of international trade. One of these is the theory of competitive advantages proposed by M. Porter. The 20th century saw a technological boom that gave countries with no absolute advantages the opportunity to gain them thanks to their economicstrategies. As an object for study, he suggested taking not the whole country, but focusing on industries.

In his theory, Porter proposed the following ways for countries to achieve competitive advantage:

• factorial conditions - labor and natural resources, professionalism of employees and enterprise infrastructure;
• the level of demand for certain products;
• state of supporting industries – availability of suppliers;
• the level of competition in the industry.

Posner's theory

In his theory of the technological gap, M. Posner argues that the absolute advantage is the result of the technological development of one of the countries compared to others. The author suggested that a country that is at a higher level of technical development will prevail under equal conditions with other countries. Technological progress can reduce production costs and provide a competitive advantage over other countries.