- Comparative advantage
- A country has a comparative advantage in a good when it can produce it at a lower cost in terms of other goods given up than another country.
- Absolute advantage
- A country has an absolute advantage over another country in producing a good if it uses fewer resources to produce that good.
Comparative advantage asks what a country gives up
Trade really occurs because of comparative advantage, and comparative advantage rests on opportunity cost. The question each country should ask is: what do we give up to produce this good? If workers take two hours to mine a tonne of copper and one hour to harvest a tonne of wheat, every tonne of copper costs two tonnes of wheat.
Check yourself
Workers take three hours to make a tonne of steel and one hour to make a tonne of wool. What does one tonne of steel cost?
A country that is better at everything still has something to give up
A high-income country can often produce every good with fewer resources than a low-income one. Trade can still benefit both, because comparative advantage picks out the good where a country's absolute advantage is relatively largest, or where its disadvantage is relatively smallest. Each specialises in that good, and total output of both goods rises.
Dividing what is given up by what is made gives each good's cost
With the same resources, the UK can make 12 aircraft parts or 6 rolls of cloth, and Vietnam can make 2 aircraft parts or 4 rolls of cloth. Which country has the comparative advantage in each good?
- Spot the absolute advantage firstThe UK makes more of both: 12 parts against 2, and 6 rolls against 4. That is absolute advantage in both, which settles nothing yet.
- Find the cost of one partUK: 6 rolls ÷ 12 parts = 0.5 roll of cloth per part. Vietnam: 4 rolls ÷ 2 parts = 2 rolls of cloth per part.
- Find the cost of one rollUK: 12 parts ÷ 6 rolls = 2 parts per roll. Vietnam: 2 parts ÷ 4 rolls = 0.5 part per roll.
- Give each good to the lower costParts cost the UK 0.5 roll against 2 rolls in Vietnam. Cloth costs Vietnam 0.5 part against 2 parts in the UK.
The UK has the comparative advantage in aircraft parts and Vietnam in cloth, even though the UK is better at making both.
Check yourself
With the same resources, the UK can make 8 tonnes of steel or 4 tonnes of wool. How many tonnes of wool does one tonne of steel cost?
0.5
4 ÷ 8 = 0.5. The resources that make one tonne of steel could have made half a tonne of wool, so divide the wool given up by the steel made.
If one country makes more of a good, doesn't it have the comparative advantage in it?
Not necessarily. Making more with the same resources is absolute advantage. In the worked example the UK makes more cloth, yet Vietnam has the comparative advantage in cloth, because each roll costs it half a part against two parts in the UK. Compare opportunity costs, never raw output. The other common slip is dividing upside down: the cost of one part is the cloth given up divided by the parts made.
Set the opportunity costs out as a small table, one row per country and one column per good, and show each division. Then write the conclusion in full: "the UK has the comparative advantage in parts, because one part costs it 0.5 roll of cloth against 2 rolls in Vietnam." A country named with no figures earns only the final mark.
Check yourself
With the same resources, the UK can make 10 cars or 20 tonnes of wheat, and Kenya can make 2 cars or 10 tonnes of wheat. Which country has the comparative advantage in wheat?
Exam question
With the same resources, the UK can make 6 laptops or 12 shirts, and Bangladesh can make 1 laptop or 8 shirts. Calculate the opportunity cost of one shirt in each country and state which country should specialise in shirts. [4]
UK: 6 ÷ 12 = 0.5 laptop per shirt. Bangladesh: 1 ÷ 8 = 0.125 laptop per shirt. Bangladesh gives up less to make each shirt, so it has the comparative advantage and should specialise in shirts, even though the UK makes more shirts.
One mark for each opportunity cost, one for naming Bangladesh and one for the reason, a lower opportunity cost. Naming the UK because it makes more shirts mistakes absolute advantage for comparative advantage.
A country has an absolute advantage in a good when it uses fewer resources to make it, and a comparative advantage when it makes the good at a lower cost in terms of other goods given up. To find the cost of one unit, divide what is given up by what is made. Each country gains by specialising where its opportunity cost is lower, even when one country is better at producing everything.