Find comparative advantage from opportunity costs
The idea
Use a common time limit and calculate what one extra unit requires giving up.
Step by step
- Use a common time limit and calculate what one extra unit requires giving up.
- The producer with the lower opportunity cost has comparative advantage in that good.
- Absolute output and comparative advantage answer different questions; trade gains also depend on the terms of exchange.
Example
In one day, A can make 8 loaves or 4 pots; B can make 6 loaves or 6 pots. Assume constant opportunity costs. Who has comparative advantage in bread?
Answer
A has comparative advantage in bread
A gives up = 0.5 pot per loaf; B gives up = 1 pot per loaf. A’s cost is lower.
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Compare two producers’ maximum outputs and calculate the cost of one unit of each good. State the model’s simplifying assumptions.
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