Graph Journal
Calculating Comparative Advantage
Definition: A person has a comparative advantage at producing something if he
can produce it at lower cost than anyone else can.
Output Method: Given a fixed number of inputs, you are going to calculate the
comparative advantage of the final production of two good in two countries
Apples
Oranges
Country X
10
15
Country Y
4
12
Notice that Country X has the absolute advantage in both apples and oranges…that
does not mean they have comparative advantage in both goods.
Calculating: If you are trying to calculate the opportunity cost of apples, apples are the
denominator unit, and oranges are the numerator (#oranges/#apples). If you are trying to
calculate the opportunity cost of oranges, oranges are the denominator unit and apples
are the numerator unit (#apples/#oranges). Whichever country has the lowest percentage
in the production of apples should produce apples, because they have to give up the least
amount of apples. Whichever country has the lowest percentage in the production of
oranges should produce oranges, because they have to give up the least amount of apples.
Apples
Oranges
Country X
10
15/10=3/2= 1.5
15
10/15=2/3= .33
Country Y
4
14/4= 7/2= 3.5
14
4/14= 2/7= .29
Notice that the opportunity cost for apples and oranges for Country X are reciprocals, the
same goes for Country Y.
Country X should produce apples. Country Y should produce Oranges.
Random tidbit: If the comparative advantage for both countries is equal, there can be
no gains from trade.
Practice:
Soccer Balls
Footballs
United States
25
35
Mexico
36
30
____________________ has the absolute advantage in soccer balls
____________________ has the absolute advantage in footballs
United States opportunity cost for soccer balls is _______
United States opportunity cost for footballs is ______
Mexico’s opportunity cost for soccer ball is ______
Mexico’s opportunity cost for footballs is ______
__________________________ has the comparative advantage in soccer balls
Graph Journal
__________________________ has the comparative advantage in footballs
Input method: Given a fixed output, you are going to calculate the comparative
advantage based on the input costs of production (this could be currency, capital, labor,
land) for two goods in two countries.
This is the labor time it takes to gather one bushel of each fruit, in each country.
Country X
Country Y
Apples
2 hours
1 hour
Oranges
3 hours
2 hours
Calculations: When you are using the input method, the thought process is flipped. When
you are trying to calculate the opportunity cost of apples, apples will be the numerator
and oranges will be the denominator (apple hours/ orange hours). When you are trying
to calculate the opportunity cost of oranges, oranges will be the numerator and apples
will be the denominator (orange hours/apple hours).
Apples
Oranges
Country X
2h 2/3=.66
3h 3/2= 1.5
Country Y
1h
½= .5
2h
2/1= 2
Country Y has the comparative advantage in apples. Country X has the
comparative advantage in oranges.
Practice
Production cost of 1 pizza
Production cost of 1 steak
Great Britain
2€
5€
Spain
4€
3€
Great Britain’s opportunity cost for producing pizza is ________________
Great Britain’s opportunity cost for producing steak is ________________
Spain’s opportunity cost for producing pizza is _______________
Spain’s opportunity cost for producing steak is _______________
______________________ has the comparative advantage in pizza
______________________ has the comparative advantage in steak