Table32-2 Opportunity Costs and Comparative Advantage
still accepted by economists as a valid statement of one of the major
sources of the gains from international trade. A country is said to have a
comparative advantage in the production of good X if the cost of
producing X in terms of forgone output of other goods is lower in that country
than in another. Thus, the pattern of comparative advantage is based on
opportunity costs rather than absolute costs. Table 32-2 illustrates the
pattern of comparative advantage in the Canada–EU example. The
opportunity cost in Canada for one kilogram of wheat is computed by
determining how much cloth must be given up in Canada in order to
produce an additional kilogram of wheat. From Table 32-1 , the absolute
costs of wheat and cloth were $1 per kilogram and $5 per metre,
respectively. Thus, in order to produce one extra kilogram of wheat, -
Canada must use resources that could have produced one-fifth of a metre
of cloth. So the opportunity cost of one kilogram of wheat is 0.2 metres of
cloth. By exactly the same reasoning, the opportunity cost of one metre of
cloth in Canada is 5.0 kilograms of wheat. These opportunity costs are
shown in Table 32-2.