How this calculator works
Comparative advantage compares the opportunity cost of producing each good, not the amount produced per hour. A country can be worse at making both goods and still gain from trade if it gives up less of the other good when it produces the first. Here, output per unit of labour is converted into opportunity cost: if one unit of labour produces a units of good A or b units of good B, one unit of A costs b/a units of B. The country with the lower opportunity cost of a good has a comparative advantage in it and should specialise there. The model assumes constant opportunity costs, two goods and two countries, no transport costs and full employment; real trade patterns involve many goods, scale economies and policy barriers.
Formula
Opportunity cost of one unit of good A in country i = output of B in country i / output of A in country i. Opportunity cost of one unit of good B = output of A / output of B. The country with the smaller opportunity cost of a good has the comparative advantage in that good.
Worked example
Country 1 produces 10 units of A or 20 of B per unit of labour, so one A costs 2 B and one B costs 0.5 A. Country 2 produces 6 units of A or 8 of B, so one A costs 1.3333 B and one B costs 0.75 A. Country 2 has the comparative advantage in A and country 1 in B.
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Frequently asked questions
Is comparative advantage the same as absolute advantage?
No. Absolute advantage compares output per unit of labour directly. Comparative advantage compares opportunity costs. A country with an absolute advantage in both goods can still benefit from importing the good in which it is relatively less productive.
What if both countries have the same opportunity costs?
There is no comparative advantage and no gain from specialisation in this two-good model. The tool reports a tie for both goods.
Why use output per unit of labour?
It is the simplest way to express productivity when labour is the only input. The same logic works with any constant resource, such as one acre of land or one unit of capital.