Interactive Examples
Comparative Advantage
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Material from this presentation can be found in:
Chapter 2
Slides by
Timothy Diette and Kevin Brady
CoreEconomics, 2e
Interactive Examples
Comparative Advantage
QUESTION:
Consider a world of two countries: Canada and the United
States (U.S.) Both countries produce and consume only two
goods: cars and wheat. The table to the right shows the
amount of cars (in millions) and wheat (in millions of metric
tons) each country is currently consuming and producing.
1. Does either country have an absolute advantage in the
production of cars or wheat?
2. What is the opportunity cost of cars in each country? Of
wheat?
Initial Consumption-Production of Cars and
Wheat in Canada and the United States
Canada
U.S.
Cars
1
2
Wheat
4
12
3. Which country has a comparative advantage in cars? In
wheat?
4. What is the total production of each good in the world?
5. Suppose these countries can now specialize, but want to
keep the total world production of cars at three million.
What is the most amount of wheat they could produce in
total?
Answer
Interactive Examples
Comparative Advantage
ANSWER:
1. Does either country have an absolute advantage in the
production of cars or wheat?
Yes! An absolute advantage exists when one country can
produce more of a good than another country. The U.S. can
produce more cars and more wheat than Canada, and so it
has an absolute advantage in the production of both goods.
Next
Initial Consumption-Production of Cars and
Wheat in Canada and the United States
Canada
U.S.
Cars
1
2
Wheat
4
12
Interactive Examples
Comparative Advantage
ANSWER:
2. What is the opportunity cost of cars in each country? Of
wheat?
In Canada, the tradeoff between cars and wheat is 1 car for
every 4 metric tons of wheat. Thus, to produce one extra car,
Canada must forgo producing 4 metric tons of wheat. The
opportunity cost of producing a car is 4 metric tons of
wheat.
Next
Initial Consumption-Production of Cars and
Wheat in Canada and the United States
Canada
U.S.
Cars
1
2
Wheat
4
12
Canada
U.S.
Opportunity
Cost of 1 car
4 Wheat
6 Wheat
Opportunity
Cost of 1
wheat
1/4 of a Car
1/6 of a Car
In the U.S., the tradeoff between cars and wheat is 1 car for
every 6 metric tons of wheat. The opportunity cost of
producing a car is 6 metric tons of wheat.
Canada can produce 4 metric tons of wheat for every car.
Thus, to produce one metric ton of wheat, the country must
forgo producing one-fourth of a car. The opportunity cost of
producing a metric ton of wheat is 1/4 of a car.
Using the same logic, in the U.S. the opportunity cost of
producing a metric ton of wheat is 1/6 of a car.
Interactive Examples
Comparative Advantage
ANSWER:
3. Which country has a comparative advantage in cars? In
wheat?
A country has a comparative advantage in producing a good
if its opportunity cost to produce that good is lower than the
other country’s.
Canada has a comparative advantage in producing cars in
this example because its opportunity cost of 4 metric tons of
wheat is less than the 6 metric tons of wheat opportunity
cost in the U.S.
On the other hand, the U.S. has a comparative advantage in
producing wheat. The U.S. has an opportunity cost of 1/6 of
a car, which is less than Canada’s 1/4 of car opportunity cost.
Next
Initial Consumption-Production of Cars and
Wheat in Canada and the United States
Canada
U.S.
Cars
1
2
Wheat
4
12
Canada
U.S.
Opportunity
Cost of 1 car
4 Wheat
6 Wheat
Opportunity
Cost of 1
wheat
1/4 of a Car
1/6 of a Car
Interactive Examples
Comparative Advantage
ANSWER:
4. What is the total production of each good in the world?
The total world production can be found by adding the
goods produced in each country. In this two-country world,
total production is 3 million cars and 16 million metric tons
of wheat.
Next
Initial
LaborConsumption-Production
Units Required to Produce
ofCars
Carsand
and
Wheat in Canada and the United States
Canada
U.S.
Cars
4
1
2
Wheat
1
4
12
2
Production in Canada and the United States
Canada
U.S.
Totals
Cars
1
2
3
Wheat
4
12
16
Interactive Examples
Comparative Advantage
ANSWER:
5. Suppose these countries can now specialize, but want to
keep the world production of cars at three million. What is
the most amount of wheat they could produce in total?
Canada has a comparative advantage in producing cars and
so it should switch its wheat production to cars. By doing
this, Canada can produce 2 million cars and no wheat.
Since the two countries desire to produce 3 million cars, the
U.S. must produce the remaining 1 million cars. They can
now use the idle resources that were used to produce their
other 1 million cars to produce an extra 6 million metric tons
of wheat, bringing the total to 18 million metric tons.
Notice that by focusing production on the goods in which
each country has a comparative advantage, the world
production of wheat increased to 18 million metric tons
from 16 million metric tons, without having to produce less
cars!
The End
Initial
LaborConsumption-Production
Units Required to Produce
ofCars
Carsand
and
Wheat in Canada and the United States
Canada
U.S.
Cars
4
1
2
Wheat
1
4
12
2
Production in Canada and the United States
Canada
U.S.
Totals
Cars
2
1
3
Wheat
0
18
18