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Who Has Comparative Advantage?

Comparative advantage in a two-goods, two-workers economy can be identified easily by comparing the relative slopes of their linear production functions.

Glossary:

  • comparative advantage
    In general, a worker or a country enjoys comparative advantage in producing a good or service if it can produce the good or service at a lower relative opportunity cost than another worker or country. In a two-goods (grapes and nuts) two-persons (Tom and Mary) economy, Tom would have comparative advantage in producing nuts if his opportunity cost of producing nuts in terms of grapes foregone is lower than Mary. In graphical terms, Tom's PPC (PPF) would have a flatter slope viewed from the nuts axis in the grapes-nuts space. But the intercept of Tom's PPC on the nuts axis need not be higher than that of Mary's PPC on the same axis.
    diagram

Topics:

Costs and opportunities, Comparative advantage

Keywords

comparative advantage, PPC, PPF, production function, production possibilities curve, production possibilities frontier