International Trade, Comparative Advantage & Opportunity Cost

Reasons why countries may engage in international trade

With the emergence of the concept of trade, countries are able to exchange goods and services across borders, and these relations between countries result in various beneficial gains. Through international trade, consumers are able to acquire a variety of goods and services which provides consumers with better options or alternatives. Along with this, with the increased competition, countries will be able to generate efficiencies by focusing on the production of goods or services that they have the best at or specializations. Therefore, trading and building international relations enables countries to develop, grow and achieve economic success. 

How the law of comparative advantage and the concept of opportunity cost are linked

In the concept of comparative advantage, opportunity cost is the main factor in order to analyze the productivity of one country over another. 

Example:

Wheat (bushels) Rice (kg)

Philippines 12 6

Indonesia 16 4

For India to produce 1  bushel of wheat, it has to give up 4 kg of rice. However, for the Philippines to produce 1 kg of wheat, it has to give up only 2 kg of rice. Therefore, the Philippines has a comparative advantage in producing rice because it has a lower opportunity cost. 

On the other hand, for the Philippines to produce 1 kg of rice, it has to give up 0.5 bushels of wheat. However, for India to produce 1 kg of rice it has to give up only 0.25 bushels of wheat. Therefore, India has a comparative advantage in producing wheat.

This shows that country may not produce efficiently than others, however, it can produce more efficiently than other goods when specializes and develop what they are best at. Therefore, a country does have a comparative advantage when they produce goods or services with lower opportunity costs while producing a greater quantity of outputs.