Principles of Macroeconomics / Unit 1 MAC 0027 worked example, 60 to 90 seconds
Comparative Advantage from a Table
The idea
To find comparative advantage from a table of what each country can produce, work in three steps. First, compute each country's opportunity cost of one unit of the first good, by dividing how much of the second good it gives up by how much of the first it gains. Second, do the same for the other good; the two answers are reciprocals. Third, the country with the lower opportunity cost in a good has the comparative advantage there and should specialize in it, exporting that good and importing the other.
In practice
Worked example: with the same resources, Country X can produce twenty units of wheat or ten of cotton, and Country Y can produce twelve of wheat or twelve of cotton. For X, one wheat costs half a cotton; for Y, one wheat costs one cotton. X has the lower cost in wheat, so X specializes in wheat. For cotton the costs reverse: two wheat for X, one wheat for Y, so Y specializes in cotton and the two trade.
Where people slip
The trap is answering with absolute advantage. In the example X can produce more wheat than Y and more of nothing else, yet the answer turns on the ratios, not the totals. A country that produces less of both goods still holds a comparative advantage in one of them, and still gains by specializing in it.
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