You can see clearly from this table that America has
the absolute advantage in the production of both food and clothing.
For example, in Europe it takes three full hours of labor
to produce a unit of food but only one unit of labor in America.
So, America has the clear absolute advantage.
At the same time, in Europe it takes four hours of labor to
produce a unit of clothing but only two hours of labor in America.
Again, America has a clear absolute advantage.
But looking at this table,
the skeptical David Ricardo asked
John Strawman the same question I am now going to ask you,
which country has the comparative advantage in food versus clothing?
Take a minute now to think about this and jot down your answers before moving on.
So, which country has the comparative advantage in food versus clothing?
Clearly, America has the comparative advantage in food,
while Europe has the comparative advantage in clothing.
This is because clothing is relatively more expensive in America,
while food is relatively more expensive in Europe.
Here's the way to think about this?
In America, one unit of food costs one-half that of a unit of clothing.
To put this another way,
for the same amount of labor resources,
you can make either one unit of food or one-half of the unit of clothing.
So the ratio of food to clothing is two to one.
In contrast, in Europe,
one unit of food costs three-quarters of a unit of clothing.
Again, to put this another way,
for the same amount of labor resources,
you can make either one unit of food in Europe or three-quarters of a unit of clothing.
Now, here is the key point and the essence of the theory of comparative advantage,
because food production is relatively cheaper in the US compared to
US clothing production and because food production is
relatively more expensive in Europe compared to European clothing production,
Europe can trade some of its clothing for
American food and both countries will be better off.
Is this clear to you yet?
If not, go back to the beginning of
this module and work your way back to this point in the lesson.
On the other hand, if you feel like you are well on your way to
understanding the theory of comparative advantage,
let's keep moving forward,
as I will now use a production possibilities
frontier analysis in our next module to shed further light on theory.
