Comparative Advantage, Specialisation and Trade

Two different comparisons

Absolute advantage means producing more of a good with the same resources — a comparison of productivity. Comparative advantage means producing a good at a lower opportunity cost — a comparison of sacrifice. Specialisation and trade are governed by comparative advantage alone. A worker who is slower at everything still has a comparative advantage in something, because opportunity costs cannot both be lower.

Output data versus input data

If the table gives output per period, the opportunity cost of one unit of X is found by dividing the other good's output by own output. If the table gives input per unit — hours needed to make one unit — the division reverses: divide own hours by the other good's hours. Reading the wrong kind of table produces exactly the opposite answer, which is why examiners set both.

Terms of trade

For both parties to gain, the exchange rate must lie strictly between the two opportunity costs. At a rate equal to one party's own cost, that party gains nothing and is indifferent. Trade lets both consume at a combination lying outside their individual production possibilities curves — the clearest demonstration that trade creates value rather than merely moving it.