How to Do the Math for Comparative Advantage
26 JUL 2018
Comparative advantage economics is a concept that attempts to model ideal trade decisions, in terms of goods produced, between countries, the idea being that each country will trade what they produce at the lowest opportunity cost. For a simple comparative advantage example, think about what happens when a country can produce one product inexpensively but has more trouble producing another product. If country "A" has a lower opportunity cost for producing cheese than wine, it should sell cheese and buy wine from a country whose opportunity cost for wine is low. This gives both countries a savings of time and money. Whoever is said to have the lowest opportunity cost for producing a good, is said to have the comparative advantage in producing that good. The math for comparative average calculation is quite simple, but it's often a difficult idea for students to conceptualize. You must first calculate opportunity cost to see who has the comparative advantage.
- Production data
- Pen and pencil
1 Analyze Your Data
Analyze your data to find the opportunity cost. For the purposes of learning, two subjects are given, with each producing two goods or services. In this example, use Mary and John are the subjects who perform services. Mary and John each paint and wallpaper rooms. In one day, Mary paints 20 rooms or wallpapers five. John paints 10 or wallpapers four. The opportunity cost must be calculated for each good. The opportunity cost for Mary painting 20 rooms is five wallpaper jobs and vice versa. She must give up five wallpaper jobs to paint 20 rooms. The same logic applies to John.
2 Calculate Mary's Opportunity Cost
Use calculations to determine the opportunity cost of Mary's painting one room versus wallpapering one room. This is where it gets tricky. To determine Mary's opportunity cost for painted rooms, calculate 5/20 to see how much of a wallpaper job she gives up for one paint job. The answer is .25. For every room Mary paints, she gives up .25 of a wallpaper job.
3 Calculate John's Opportunity Cost
Use the same calculations for John's painting: 4/10 = .4. For every room that John paints, he gives up .4 of a wallpaper job.
4 Compare Opportunity Costs
Determine which opportunity cost number is less, to see who has the smaller opportunity cost for painting. This person also has the comparative advantage. Because .25 is less than .4, Mary has the comparative advantage in painting. Therefore, Mary should paint rooms because it costs John more time than it does Mary.