What are the benefits
An economy possesses a comparative advantage in the production of a good or service if it can produce the same at a lower opportunity cost than its rivals. David Ricardo's theory of comparative advantage asserts that an economy can engage in mutually beneficial trade with another country, even if the other country is better at producing every good and service, by specializing in the production of good it has a comparative advantage in and exchanging the surplus for the good it has a higher opportunity cost in production.
Considering the given data of the number of labor hours required to produce Good X and Good Y for Country A and Country B:
| Country A | Country B | |
| Good X | 15 | 12 |
| Good Y | 30 | 10 |
Calculating production possibilities from the schedule above, in the absence of trade, Country A can produce 2 units of Good X or 1 unit of Good Y in 30 hours of labor. Similarly, Country B can produce 2.5 units of Good X or 3 units of Good Y in 30 hours of labor, assuming 30 hours of labor as the standard denomination for a comparison.
Step by step
Solved in 4 steps
