Social Sciences and History / Unit 15 SSH 1429 worked example, 60 to 90 seconds
Computing Comparative Advantage From Two Opportunity Costs
The idea
The exam gives two countries' output per worker in two goods and asks who should make what, and the anchor's rule is opportunity cost, computed from the ratio. For each country, the opportunity cost of one unit of good A is how much of good B a worker could have made instead: output of B divided by output of A. The country with the lower opportunity cost in A has the comparative advantage in A and should specialize there; the other holds it in B, since the ratios are reciprocals. Absolute advantage, producing more per worker, may belong to one country in both goods; comparative advantage never can. Both gain by specializing and trading at any price between the two opportunity costs.
In practice
Given "a worker in X makes ten shirts or five phones; in Y, four shirts or four phones", X's opportunity cost of a phone is two shirts, Y's is one shirt: Y has the comparative advantage in phones, X in shirts, though X has the absolute advantage in both. Trading one phone for a shirt and a half, both consume beyond their production. Ask for the ratio.
Where people slip
The trap is picking the bigger producer; absolute advantage decides nothing about specialization. The second trap is inverting the ratio; keep the good you are pricing in the denominator.
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