A country has a comparative advantage in producing a good when:

Question

Accepted Answer

It can produce the good at a lower opportunity cost than another country. A country has a comparative advantage in producing a good when it can produce that good at a lower opportunity cost than another country. Opportunity cost is measured in terms of the other goods that must be given up - the country that sacrifices the least to produce a given good has the comparative advantage in that good. This principle is the basis for mutually beneficial trade, as both countries can gain by specializing in their comparative advantage goods.

Producing a good using fewer resources describes absolute advantage, not comparative advantage - a country can have an absolute advantage in producing everything but still benefit from trade based on comparative advantage. The claim about producing more of a good than any other country also describes absolute advantage or total output, which does not determine the gains from trade. Having more natural resources than other countries describes resource endowment, which may contribute to absolute advantage but does not determine comparative advantage - even resource-poor countries have comparative advantages in certain goods.

Comparative advantage and trade are tested on the CLEP Microeconomics exam. Students should be able to calculate opportunity costs from production possibility data, determine which country has the comparative advantage in each good, and explain why trade based on comparative advantage benefits both parties even when one country has an absolute advantage in everything.

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