Provide an example to illustrate the concept of comparative advantage.

Provide an example to illustrate the concept of comparative advantage.

One example to illustrate the concept of comparative advantage is the trade relationship between two countries, Country A and Country B, producing two goods, wheat and cloth.

Let's assume that Country A can produce 10 units of wheat or 5 units of cloth in one hour, while Country B can produce 8 units of wheat or 4 units of cloth in one hour.

In this scenario, Country A has an absolute advantage in both wheat and cloth production since it can produce more of both goods in the same amount of time compared to Country B. However, comparative advantage focuses on the opportunity cost of producing a good.

To determine comparative advantage, we need to calculate the opportunity cost of producing each good in terms of the other good. For Country A, the opportunity cost of producing one unit of wheat is 0.5 units of cloth (5 cloth/10 wheat), while the opportunity cost of producing one unit of cloth is 2 units of wheat (10 wheat/5 cloth). On the other hand, for Country B, the opportunity cost of producing one unit of wheat is 0.5 units of cloth (4 cloth/8 wheat), and the opportunity cost of producing one unit of cloth is 2 units of wheat (8 wheat/4 cloth).

Comparing the opportunity costs, we can see that Country A has a lower opportunity cost of producing cloth (0.5 units of wheat) compared to Country B (2 units of wheat). Conversely, Country B has a lower opportunity cost of producing wheat (0.5 units of cloth) compared to Country A (2 units of cloth).

Based on this analysis, Country A has a comparative advantage in cloth production, while Country B has a comparative advantage in wheat production. Therefore, it would be beneficial for both countries to specialize in the production of the good in which they have a comparative advantage and then trade with each other. Country A can focus on producing cloth, while Country B can focus on producing wheat. By specializing and trading, both countries can maximize their overall production and consumption, leading to mutual gains from trade.