|Posted on April 15, 2014 at 9:45 AM|
To determine which country has the comparative advantage in the production of a good, you must determine which country has the lowest opportunity cost (smallest sacrifice) in producing the good.
For example: If Nobully can produce 120 yak skin coats or 60 glockenspiels, then its opportunity cost of producing 1 yak skin coat is 1/2 glockenspiel (60 glockenspiels divided by 120 yak skin coats). If Medicoa can produce 60 yak skin coats or 120 glockenspiels, its opportunity cost of 1 yak skin coat is 2 glockenspiels (120 glockenspiels divided by 60 yak skin coats). Nobully has the comparative advantage in yak skin coat production because its opportunity cost (1/2) is less than Medicoa's opportunity cost (2).
The No Bull Review video below explains how to calculate absolute advantage, comparative advantage, and terms of trade using charts and production possibilities curves. You will learn how to develop your own chart to make these problems easy to solve.
AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts