Question

Explain the principle of comparative advantage in nontechnical terms.

Answer 1

Suppose there are 2 nation's and both cab produce 2 goods (X and Y). But say nation 1 can produce X using lesser unit of resources as compared to used in producing Y and that nation 2 uses to produce X. Then in that case, nation 1 would have comparative advantage in producing X. Comparative advantage is used when one nation has absolute advantage in producing both the goods so here let's assume nation 1 has absolute advantage in producing X and Y. I.e. nation 1 can produce X and Y using lesser number of resources as compared to what nation 2 needs. Now if nation 1 can produce X using lesser unit of resources as compared to what nation requires to produce Y, then nation 1 has comparative advantage in X while nation 2 has comparative advantage in producing Y.

X Y

Nation 1 5 15

Nation 2 8 16

In this example, nation 1 has absolute advantage in producing both the goods, but it ab produce X using relatively lesser units of resources (1/3 rd of what it requires for Y) thus, nation 1 has comparative advantage in X. Nation 2 has absolute disadvantage in producing both the goods. But it can produce Y using relatively lesser units of resources ( twice more than X while nation 1 needs thrice more than X) this nation 2 has comparative advantage in producing Y .