4.1.2 (HL)—Absolute and comparative advantage

Absolute advantage means producing more with the same resources; comparative advantage means producing at a lower opportunity cost.

Trade gains come from comparative advantage. Calculate what must be given up to make one extra unit of each good, then specialise where that sacrifice is smaller. A country can have absolute advantage in both goods and still gain by trading.

For each producer: compute opportunity cost for both goods, identify the lower cost, and check that the proposed terms of trade lie between the two opportunity costs.

If A can make 10 cloth or 5 wine, one cloth costs A 0.5 wine. If B can make 6 cloth or 4 wine, one cloth costs B 0.67 wine. A has comparative advantage in cloth; B has comparative advantage in wine, even though A makes more of both goods per stated resource set.

Do not choose the country with the larger output as the automatic exporter. Output is absolute advantage; the relevant trade test is opportunity cost.