Principles of Microeconomics / Unit 1 MIC 0029 worked example, 60 to 90 seconds
Comparative Advantage from a Table
The idea
To find comparative advantage from a table of what each producer can make, work in three steps. First, compute each producer'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 producer with the lower opportunity cost in a good has the comparative advantage there, should specialize in it, and should trade for the other.
In practice
Worked example: with the same resources, Country A can make sixty shirts or twenty tablets, and Country B can make twenty shirts or ten tablets. For A, one tablet costs three shirts; for B, one tablet costs two shirts. B has the lower cost in tablets, so B specializes in tablets. For shirts the costs reverse: a third of a tablet for A, half a tablet for B, so A specializes in shirts and the two trade.
Where people slip
The trap is answering with absolute advantage. In the example A can make more shirts and more tablets than B, and yet B holds the comparative advantage in tablets, because the answer turns on the ratios, not the totals. A producer that makes less of everything still has a lower opportunity cost in something, and still gains by specializing in it.
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