Absolute advantage, economic concept that is used to refer to a party's superior production capability. Specifically, it refers to the ability to produce a certain good or service at lower cost (i.e., more efficiently) than another party. (A "party" may be a company, a person, a country, or anything else that creates goods or services.)

The concept of absolute advantage was first introduced in 1776 in thecontextofinternational tradebyAdam Smith, a Scottish philosopher considered the father of moderneconomics. In his monumental workAn Inquiry into the Nature and Causes of the Wealth of Nations, he argued that, in order to become rich, countries should specialize in producing the goods and services in which they have absolute advantage and engage infree tradewith other countries to sell their goods. A country's resources would therefore be utilized in the best possible wayin the production of goods and services in which the country has a productivity advantage compared with other countriesand national wealth would be maximized.

Smith proposed that thesis as analternativeto the then prevalent view calledmercantilism, which favored strict government control on international trade and relied on the principle that countries should produce as much of everything as possible. Over time, Smith's view came to be known as the absolute advantage theory of trade and was the dominant trade theory untilDavid Ricardo, a 19th-century English economist, developed the theory ofcomparative advantage.

6. How does Ricardo alter Adam Smith's theory of absolute advantage?How does Ricardo substantially improve trade theory?