The conclusions about the gains from trade arising from international
differences in opportunity costs are summarized below.
1. The opportunity cost of producing X is the output of other
products that must be sacrificed in order to increase the output of
X by one unit.
2. Country A has a comparative advantage over Country B in
producing a product when its opportunity cost of production is
lower. This implies, however, that Country A has a comparative
dis advantage in some other product(s).
3. When opportunity costs for all products are the same in all
countries, there is no comparative advantage and there is no
possibility of gains from specialization and trade.
4. When opportunity costs differ in any two countries and both
countries are producing both products, it is always possible to
increase total production of both products by a suitable
reallocation of resources within each country.Though the concepts of comparative advantage and specialization are
relatively straightforward, it is helpful to work through numerical
examples to solidify your understanding. Applying Economic Concepts
1 provides two examples and works through the computations of
absolute and comparative advantage.
Applying Economic Concepts 32-1