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Home > Economics FAQs Blogs > I'm confused about how to calculate the ratios after specialisation in the context of absolute and comparative advantage. Do I just double the country's output?

I'm confused about how to calculate the ratios after specialisation in the context of absolute and comparative advantage. Do I just double the country's output?

Relevant Topics

This question pertains to topics in Microeconomics, such as Comparative Advantage, Absolute Advantage, Opportunity Cost, Specialisation and Trade

Definitions:

Absolute Advantage: A country has an absolute advantage if it can produce more of a good or service with the same amount of resources than another country.

Comparative Advantage: A country has a comparative advantage if it can produce a good or service at a lower opportunity cost than another country.

Detailed Explanation:

When calculating the output ratios after specialisation, the key is to consider the opportunity cost of producing one good in terms of another. The country that can produce a good at a lower opportunity cost (thus having the comparative advantage) should specialise in producing that good.

Remember that the output doesn't necessarily double; it depends on the resources available and how efficiently they are used. Specialisation according to comparative advantage allows for increased total output, but the exact increase depends on the specific opportunity costs.

To calculate the ratios:
Determine which country has the comparative advantage in producing each good.
Assume that each country specialises in producing the good for which it has a comparative advantage.

The ratio of output for each good will then be determined by the opportunity cost of producing that good in each country.

Example: 

Consider two countries, Country A and Country B, producing two goods, X and Y.

Country A can produce 10 units of X or 20 units of Y in a day.

Country B can produce 5 units of X or 15 units of Y in a day.

Country A has an absolute advantage in the production of both goods because it can produce more of both goods in a day than Country B.
However, the country with the comparative advantage in each good is determined by the opportunity cost of producing each good.

For Country A, the opportunity cost of producing 1 unit of X is 2 units of Y, while for Country B, the opportunity cost of producing 1 unit of X is 3 units of Y. Therefore, Country A has a comparative advantage in producing Good X.

For Country A, the opportunity cost of producing 1 unit of Y is 0.5 units of X, while for Country B, the opportunity cost of producing 1 unit of Y is 0.33 units of X. Therefore, Country B has a comparative advantage in producing Good Y.

If both countries specialise according to their comparative advantages, Country A would produce only Good X, and Country B would produce only Good Y. This specialisation would allow for increased total output.

Summary:

In the context of absolute and comparative advantage, output ratios after specialisation don't necessarily double; they depend on the opportunity cost of producing goods in each country. By calculating the opportunity costs and determining which country has a comparative advantage in producing each good, we can establish a more efficient allocation of resources that can lead to an increase in total output.

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