A country has a comparative advantage over another in the production of a good if it can produce i

Comparative Advantage:

A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost: i.e. it has to forego less of other goods in order to produce it.

OUTPUT  Scenario One (an “OR” situation)

For the UK to produce 1 unit of textiles it has an opportunity cost of 4 books.

However for India to produce 1 unit of textiles it has an opportunity cost of 1.5 books

• Therefore India has a comparative advantage in producing textiles because it has a lower opportunity cost (0.67 ratio of textiles to books).
• The UK has a comparative advantage in producing books because it has a lower opportunity cost (because it has a lower ratio of .025 books to textiles compared to India’s 0.67)

If each country now specializes in one good, with all else remaining constant, output will increase. Rather than one worker in the UK producing textiles or books, they specialize.  With specialization, output per worker increases.  In our example, it doubled.

OUTPUT Scenario Two

Therefore output of both goods has increased illustrating the gains from comparative advantage.

NOW THEY TRADE:  Scenario Three (an “AND” situation)

Compare Scenario Three to Scenario One. The UK still has 4 books, but now has 2 textiles.  India still has 2 textiles, but now has 4 books.  Both countries are better off with specialization and trade.