EFB336 Chap.2 Comparative Advantage and Factor Endowments
Comparative Advantage and Factor Endowments
Comparative advantage depends on relative opportunity costs, not on who can produce the most of everything. A production possibility frontier shows the feasible trade-off, while relative labour productivity or factor abundance determines specialisation in different models. Trade can expand consumption possibilities, yet its income effects are not neutral.
Product prices change factor rewards, creating domestic winners and losers even when aggregate real income rises.
What this chapter covers
- 01
Absolute and comparative advantage
- 02
Opportunity cost from a production frontier
- 03
Relative productivity and specialisation
- 04
Factor abundance and goods intensity
- 05
Relative goods prices and factor rewards
- 06
Aggregate gains and distributional conflict
Worked example · free
Find comparative advantage from unit labour needs
- +1Home’s opportunity cost of one wheat unit is 2/6 = one-third of a cloth unit.
- +1Foreign’s opportunity cost of one wheat unit is 3/6 = one-half of a cloth unit.
- +1One-third is below one-half, so Home sacrifices less cloth when producing wheat.
- +1Home therefore has comparative advantage in wheat, while Foreign has comparative advantage in cloth.
Key terms
- Opportunity cost
- The output of one good forgone to produce an additional unit of another good.
- Factor abundance
- A country’s relative supply of one productive factor compared with another factor.
- Factor intensity
- The relative amount of a productive factor used to make a particular good.
Comparative Advantage and Factor Endowments FAQ
Can a less productive country still export?
Yes. A country may have an absolute disadvantage in both goods and still possess comparative advantage in the good for which its relative productivity disadvantage is smaller. Export direction follows opportunity cost, while wages and exchange conditions help reconcile productivity differences.
Does trade make everyone better off?
Trade can raise the economy’s aggregate consumption possibilities, but changes in goods prices alter demand for factors. Owners of the factor used intensively in the export sector may gain while others lose. An adequate answer separates total gains from distribution within each country.
How do I read a production possibility frontier?
Its slope is the opportunity cost of the horizontal-axis good in terms of the vertical-axis good. A straight frontier implies constant opportunity cost; curvature indicates changing trade-offs. A trading price line can support consumption beyond the no-trade frontier without expanding production feasibility itself.
Exam move
Revise this chapter by separating three questions that are often blended. The first asks which country has comparative advantage. Write unit labour requirements or frontier intercepts in a table, calculate the opportunity cost of each good in both countries and compare costs expressed in identical units.
Reverse the ratios as a check: the country with comparative advantage in wheat should not also have comparative advantage in cloth in a two-country, two-good example. The second question asks whether trade can benefit both countries. Place a possible world relative price between the two autarky opportunity costs, then show how each exporter receives more of the import good per unit than domestic transformation would provide.
Keep the production point, export and import quantities, and final consumption point distinct. Trade changes the consumption opportunity through exchange; it does not itself add labour or shift the production frontier. The third question concerns distribution.
For factor-endowment problems, write one line identifying which country is relatively abundant in which factor and another identifying which good uses that factor intensively. Only then trace a relative goods-price change into factor demand and real rewards. For short-run questions, consider factors tied to an import-competing or export sector and explain why mobility takes time.
Use blank diagrams for daily practice: label axes, intercepts, the opportunity-cost slope and a trading-price line without copying a finished picture. Follow each diagram with four sentences: assumption, mechanism, aggregate implication and distributional qualification. End the week with mixed prompts in which one country is absolutely more productive in both goods, because these expose reliance on absolute advantage.
A strong final answer names comparative advantage from relative sacrifice, demonstrates mutually acceptable trading terms and refuses to equate an aggregate gain with a gain for every factor owner.
Working through Comparative Advantage and Factor Endowments in EFB336? Sia is AskSia’s AI Economics tutor — ask any EFB336 Comparative Advantage and Factor Endowments question and get a clear, step-by-step explanation grounded in how EFB336 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
