1.3 Comparative Advantage and Gains from Trade
A country has comparative advantage in the good it makes at lower opportunity cost; specializing and trading at terms between the two costs benefits both sides.
Absolute advantage means producing more of a good with the same resources; comparative advantage means producing it at a lower opportunity cost. Trade decisions run on comparative advantage — a country can hold absolute advantage in both goods but never comparative advantage in both.
To find it, convert every table to opportunity cost per one unit. With output data, the cost of one unit of good X is the other good's output divided by X's output; with input data, the ratio flips because fewer inputs is better. Whoever gives up less has the comparative advantage.
Both countries gain when the terms of trade fall strictly between their two opportunity costs. If one ton of wheat costs Country A 2 shirts and Country B 5 shirts, any price between 2 and 5 shirts per ton leaves both better off than self-sufficiency — at exactly 2 or 5, one side gains nothing from trading.
Key terms for 1.3
Drag the curves yourself — the fastest way to make 1.3 stick.
Practice the math
Assigning comparative advantage to whoever produces the most — that is absolute advantage. Comparative advantage always goes to the producer with the lower opportunity cost, so compute the per-unit cost table first.
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