QUANTITATIVE ECONOMICS

Topic 12 – Comparative Advantage
You need to be able to:
Calculate opportunity costs from a set of data in order to identify comparative
advantage.
Draw a diagram to illustrate comparative advantage from a set of data.
Calculating opportunity costs from a set of data in order to identify comparative
advantage.
Step 1
In order to identify the comparative advantage that a country has over another country in
producing certain goods, it is necessary to work out their opportunity costs of producing the
goods in question.
A country is said to have a comparative advantage in the production of a good if it can
produce the good at a lower opportunity cost than another country. In simpler words,
country A has to give up fewer units of other goods to produce the good in question than
does country B.
In order to work out the opportunity costs, we need to calculate how much of one good a
country has to give up, in order to produce a unit of another good, using the equation:
E.g.
Country Litres of
wine
Opportunity cost of 1
litre of wine
Kilos of
cheese
Opportunity cost of 1
kilo of cheese
France 3 4/3 kilos of cheese 4 3/4 litre of wine
Poland 1 3 kilos of cheese 3 1/3 litre of wine
The table shows the production outcomes where two countries, France and
Poland, are using the same quantities of resources to produce wine and cheese.
The opportunity cost of a unit of wine in France, substituting into our equation, is:
The opportunity cost of a unit of cheese in France, substituting into our equation, is:
The opportunity cost of a unit of wine in Poland, substituting into our equation, is:
The opportunity cost of a unit of wine in Poland, substituting into our equation, is:
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