law of comparative advantage

1. |1
faculty of economics
and business
Economics for IB
Trial Lecture
Comparative Advantage
The Hague University
of Applied Sciences

2. |2
faculty of economics
and business
Economics for IB
Have you ever thought about:
1. Why one country do not produce
everything itself? And
2. How countries decide in which
product they should specialize?
The Hague University
of Applied Sciences

3. faculty of economics
and business
| 3
Learning Objectives
1. To learn law of comparative advantage and
its application in international trade.
2. To understand the opportunity cost concept
and its relation to comparative advantage.
The Hague University
of Applied Sciences

4. faculty of economics
and business
| 4
What is a Comparative
Advantage?
A comparative advantage occurs
when a country can produce a
good or service at a lower
opportunity cost than another
country.
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5. faculty of economics
and business
| 5
What is an Opportunity Cost?
An opportunity cost is the
foregone benefits from choosing
one alternative over others.
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of Applied Sciences

6. faculty of economics
and business
|6
Example
Consider two countries (France and United
States) that produce two goods: Plans and
Cruise ships.
1) In France, one hour of a worker’s labour
can produce either 5 Plans or 10
cruise ships.
2) In US, one hour of a worker’s labour can
produce either 20 Plans or 20 cruise
ships.
The Hague University
of Applied Sciences

7. faculty of economics
and business
|7
Example
1. What is the opportunity cost of 5 Plans for
France?
2. What is the opportunity cost of 10 Cruise ships
for France?
3. What is the opportunity cost of 20 Plan for US?
4. What is the opportunity cost of 20 Cruise ships
for US?
Countries Plans Cruise ships
France 5 10
US 20 20
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10 CS
20 CS
5 Plans
20 plans

8. faculty of economics
and business
|8
Example
To analyse the comparative advantage of
both countries (France and US), we will
follow the four steps:
1. Compute the opportunity cost of one Plan for
France and US.
2. Compute the opportunity cost of one Cruise
ship for France and US.
3. Compare the opportunity costs of each
product among France and US
4. Make the conclusion
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of Applied Sciences

9. faculty of economics
and business
9
Step-1: Compute the opportunity cost of 1
Plan for France and US?
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2.US
20P=20CS
1P=20/20=1CS
1.France
5P=10CS
1P=10/5=2CS
Opportunity cost of
1 plan for France is
2 cruise ships
Opportunity cost
of 1 plan for US is
1 cruise ship
Countries Plans Cruise ships
France 5 10
US 20 20

10. faculty of economics
and business
10
Step-2: Compute opportunity cost of 1 Cruise
ship for France and US?
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3.France
10CS=5P
1CS=5/10=1/2P
4.US
20CS=20P
1CS=20/20=1P
Opportunity
cost of 1
cruise ships
is ½ plan
Opportunity
cost of 1
cruise ships is
1 plan
Countries Plans Cruise ships
France 5 10
US 20 20

11. faculty of economics
and business
11
Summary of opportunity cost
Who has the less opportunity cost for plans;
France or US?
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Countries/ Product Opportunity Cost
(1 Plan)
Opportunity Cost
( 1 Cruise ship)
France 1 Plan cost 2CS 1CS cost ½ Plan
US 1 Plan cost 1CS 1 CS cost 1 Plan
US

12. faculty of economics
and business
| 12
Example
Who has the less opportunity cost for Cruise ships;
France or US?
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of Applied Sciences
Countries/ Product Opportunity Cost
(1 Plan)
Opportunity Cost
( 1 Cruise ship)
France 1 Plan cost 2CS 1CS cost ½ Plan
US 1 Plan cost 1CS 1 CS cost 1 Plan
France

13. faculty of economics
and business
| 13
Conclusion/Decision
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France
France has low
opportunity cost
than US for Cruise
ships
US
US has low
opportunity cost than
France for Plans
France has
comparative
advantage in
producing cruise
ships, specialize
in cruise ships
US has
comparative
advantage in
producing
Plans,
specialize in
plans

14. faculty of economics
and business
Thanks for your attention!
Any Question?
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of Applied Sciences