International Trade - Theory and Policy, 2010a

comparative advantage in newspaper and journal stories about trade. Many times authors write
“comparative advantage” when in actuality they are describing absolute advantage. This misconception
often leads to erroneous implications, such as a fear that technology advances in other countries will cause
our country to lose its comparative advantage in everything. As will be shown, this is essentially
impossible.
To define absolute advantage, it is useful to define labor productivity first. To define comparative
advantage, it is useful to first define opportunity cost. Next, each of these is defined formally using the
notation of the Ricardian model.
Labor Productivity
Labor productivity is defined as the quantity of output that can be produced with a unit of labor.
Since aLC represents hours of labor needed to produce one pound of cheese, its reciprocal, 1/aLC,
represents the labor productivity of cheese production in the United States. Similarly, 1/aLW represents
the labor productivity of wine production in the United States.
Absolute Advantage
A country has an absolute advantage in the production of a good relative to another country if it can
produce the good at lower cost or with higher productivity. Absolute advantage compares industry
productivities across countries. In this model, we would say the United States has an absolute advantage
in cheese production relative to France if
or if
aLC1a∗LC.
The first expression means that the United States uses fewer labor resources (hours of work) to produce a
pound of cheese than does France. In other words, the resource cost of production is lower in the United
States. The second expression means that labor productivity in cheese in the United States is greater than
in France. Thus the United States generates more pounds of cheese per hour of work.
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