Overview

Comparative advantage is the standard theory that explains how much of each good a nation will choose to produce in the presence of free trade with other nations. The intuition is not that a country will produce the good that it is best at producing, but rather that it will produce the goods for which it has a comparative advantage.

The standard example is that of a lawyer in a small town who is the best lawyer, but also the best typist in the town. The lawyer can pay someone else a relatively small amount of money to type for her, even if the paid typist is a worse typist than the lawyer, and focus on spending her time utilizing her legal skills making a larger amount of money than if she used that time to type.

Production Frontier

The productiion frontier is a graph of the production possibilities of a given country or set of countries. It demonstrates the trade offs between goods that a country could produce.

The following hypothetical chart shows the production possibilities of two countries (Britain and France) for the goods: apples (y-axis) and oranges (x-axis).



In this hypothetical scenario, Britain can outproduce France for either apples or oranges. The slope of the production line shows the trade-offs between the two goods, by producing less apples, each country is able to produce more oranges. The slope {% m %} is a measure of this tradeoff.

In this example, Britain has a comparative advantage for producing oranges. This means that Britain will focus on producing oranges, opting to import its apples from France by selling them their oranges.