Principles of Microeconomics / Unit 16 MIC 1504 worked example, 60 to 90 seconds
Reading a Productivity Table
The idea
From a table of output per worker in two countries and two goods, find absolute advantage by comparing the larger numbers. Find each country's opportunity cost of a unit of one good as the other good's output divided by that good's output. The lower opportunity cost is the comparative advantage; the other good's cost is its reciprocal, so the other country holds the comparative advantage there. Then say who specializes in what. Do it for a country better at everything, the case that tests understanding.
In practice
Worked example: a Northland worker makes eight tons of wheat or four bolts of cloth a day; a Southland worker makes two tons or two bolts. Northland has the absolute advantage in both. Northland's bolt costs two tons, since eight divided by four is two; its ton costs half a bolt. Southland's bolt costs one ton and its ton one bolt. Northland's ton is cheaper, half a bolt against one, so Northland's comparative advantage is wheat; Southland's bolt is cheaper, one ton against two, so Southland's is cloth. Northland exports wheat and imports cloth, though it could make more of both.
Where people slip
Divide to get opportunity cost; never compare raw outputs across countries, which gives absolute advantage again. And when one country is better at both, its comparative advantage is where its lead is largest, and the other's is where its lag is smallest.
Your place on the trail
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