Knowledge Base
What are tariffs?
What are quotas?
What is the difference between absolute advantage and comparative advantage?
How do I figure out which good a country or party has a comparative advantage between two goods?
Imagine you have two countries, the United States and Germany. The United States can make 10 cars per day and 4 airplanes. Germany can make 7 cars per day and 3 airplanes. In order to find which good the United States has a comparative advantage in, we must figure out the ratio of production of each good. First, the United States can make cars at a ratio of 10 to 7 compared to Germany, or 10 divided by 7. That equals 43% more efficiently than Germany. Next, the United States can make cars at a ratio of 4 to 3, or 4 divided by 3, which equals 33% more efficiently.
To find comparative advantage, you look at which good can be produced more efficiently. Since 43% is greater than 33%, the United States has a comparative advantage in producing cars. It should specialize in producing cars and trade with Germany for airplanes. This way it will end up with more of both than if it were to try to produce both on its own.