Economics – International trade and globalisation - Specialisation and free trade | e-Consult

To determine comparative advantage, we need to compare the opportunity costs of producing each good in each country. Opportunity cost is what you give up to produce something else. It's calculated as the amount of one good that must be sacrificed to produce one unit of another good.

Country A:

• Opportunity cost of 1 unit of Wheat = 6/4 = 1.5 units of Textiles
• Opportunity cost of 1 unit of Textiles = 4/6 = 0.67 units of Wheat

Country B:

• Opportunity cost of 1 unit of Wheat = 12/8 = 1.5 units of Textiles
• Opportunity cost of 1 unit of Textiles = 8/12 = 0.67 units of Wheat

Country C:

• Opportunity cost of 1 unit of Wheat = 4/2 = 2 units of Textiles
• Opportunity cost of 1 unit of Textiles = 2/4 = 0.5 units of Wheat

Analysis:

• Wheat: Country A has a lower opportunity cost of producing wheat (1.5 units of textiles) compared to Country B (also 1.5 units of textiles) and Country C (2 units of textiles). Therefore, Country A has a comparative advantage in wheat production.
• Textiles: Country A has a lower opportunity cost of producing textiles (0.67 units of wheat) compared to Country B (0.67 units of wheat) and Country C (0.5 units of wheat). Therefore, Country A has a comparative advantage in textiles production.

Conclusion: Country A has a comparative advantage in both wheat and textiles production because it has the lowest opportunity cost for producing both goods compared to the other two countries. This suggests that Country A would benefit most from specialising in the production of both wheat and textiles and then trading with the other countries.