1.3 Comparative Advantage and Gains from Trade

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.