Comparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors, at all times, can mutually benefit from cooperation and voluntary trade. The theory was developed by 19th-century British economist that the cause and benefits of to the differences in the relative costs (in terms of other goods given up) of producing the same commodities among countries. Comparative advantage theory explains why a country might produce and export something its citizens don’t seem very skilled at producing when compared directly to the citizens of another country. Consider two countries (England and Ukraine) that use labor as an input to produce two goods: Corn and wheat.
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In England, one hour of a worker’s labor can produce either 5 corn or 10 wheat
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In the Ukraine, one hour of a worker’s labor can produce either 20 corn or 20 wheat.
It is important to note that the Ukraine enjoys an absolute advantage in the production of corn and wheat. With one labor hour, a worker can produce either 20 corn or 20 wheat in the Ukraine compared to England’s 5 corn or 10 wheat.
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The Ukraine enjoys an absolute advantage in the production of corn and wheat.
To determine the comparative advantages of England and the Ukraine we must first determine the opportunity cost for each output:
England
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Opportunity cost of 1 corn = 2 wheat
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Opportunity cost of 1 wheat= ½ corn
Ukraine
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Opportunity cost of 1 corn = 1 wheat
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Opportunity cost of 1 wheat= 1 corn
When comparing the opportunity cost of 1 corn for both England and Ukraine, we can see that the opportunity cost of corn is lower in Ukraine. Therefore, Ukraine enjoys a comparative advantage in the production of corn.
Additionally, when comparing the opportunity cost of 1 wheat for England and Ukraine we can see that the opportunity cost of wheat is lower in England. Therefore, England enjoys a comparative advantage in the production of wheat.
Bibliography: https://corporatefinanceinstitute.com, https://www.econlib.org https://www.investopedia.com.
