Comparative Advantage
Trade starts with a trade-off. Compare what two countries give up, then see how specialization can expand their consumption possibilities.
Two countries. Two goods.
Enter the maximum units each country could produce in the same period if it devoted all its resources to just one good. These are alternatives, not simultaneous outputs.
Country A
Country B
What does one extra unit cost?
1 Wheat costs 0.5 Cloth
1 Cloth costs 2 Wheat
What does one extra unit cost?
1 Wheat costs 1 Cloth
1 Cloth costs 1 Wheat
Country A has comparative advantage in Wheat, while Country B has comparative advantage in Cloth. A possible pattern is full specialization in these goods. Absolute output does not determine comparative advantage.
Both can move beyond their original possibilities.
Choose a trade price of 1 Wheat for 0.75 Cloth, between the two opportunity costs (0.5 and 1). After full specialization, Country A exports 40 Wheat in exchange for 30 Cloth.
Country A consumes
Producing this bundle alone would require 120% of its resources.
Country B consumes
Producing this bundle alone would require 116.6667% of its resources.
On a linear production possibilities frontier, X / maximum X + Y / maximum Y = 1. Both consumption bundles above exceed 1: they lie outside each country’s original frontier. This demonstrates expanded consumption possibilities, not more of both goods than every possible starting bundle. Values are rounded for display; calculations use full precision.
What is this?
Comparative advantage means producing a good at a lower opportunity cost: giving up less of the other good. A country may have an absolute advantage in both goods and still gain from trade. The model assumes constant opportunity costs, divisible goods, full employment, and no transport costs or trade barriers.
How to use it
Use maximum possible output, not hours required per unit. Change a capacity to recalculate both countries’ opportunity costs. The example selects a price between those costs and a trade quantity that both specialized producers can supply. Actual gains also depend on preferences and trade costs.