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The distribution of economic resources and technological levels among nations are different. International trade is a method which enables nations to specialize and increases the productivity of their resources. Therefore, nations’ production capacities can be increased, their production possibility frontier will move rightward. The international economy is very complex. Each country has a unique pattern of trade. But every one of them must benefit from the trading in order for them to do that. The following example presents a hypothetical example of two countries: Japan and China both producing fish and cloth, and assuming labor is the only input. ---- Output per worker per day in either fish or cloth---- ------------------- Japan----------China----------------------- fish------------------8-------------4---------------------------- Cloth----------------4 -------------3--------------------------- Japan has absolute advantage in producing both fish and cloth because one worker can produce more of either goods in Japan. Absolute advantage is determined by comparing the absolute productivity in different countries of producing each good. It seems that there is no need for Japan to trade because Japan can produce both more of both goods. However, absolute advantage is not the critical consideration. What matters is comparative advantage. Comparative advantage is determined by comparing the opportunity cost of each good in different countries. It is measured by what must be given up in producing one good using the same resource, like one worker per day.For our example: Japan’s opportunity cost of producing 1 unit of fish (in terms of cloth given up) = 4/8=0.50 China’s opportunity cost of producing 1 unit of fish (in terms of cloth given up) = ¾ = 0.75 Since Japan’s opportunity cost is lower, Japan has comparative advantage on fish production and will export fish. The comparative advantage of cloth is found the same way. Japan’s opportunity cost of producing 1 unit of cloth (in terms of fish given up) = 8/4 = 2 China’s opportunity cost of producing 1 unit of cloth (in terms of fish given up) = 4/3 = 1.33 China’s comparative advantage is on cloth production because China has a lower opportunity cost. China should export cloth and import fish from Japan instead of fishing itself. Opportunity cost, which is reflected in the comparative advantage, is the key to international trading. We benefit from trade if we are able to obtain a good from a foreign country by giving up less than we would have to give up to obtain the good at home.
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