The distribution of economic resources and technological levels among nations ar

e different.
International trade is a method which enables nations to specialize and increase
s the productivity of their resources.
Therefore, nations production capacities can be increased, their production possi
bility frontier will move rightward.
The international economy is very complex. Each country has a unique pattern of
trade.
But every one of them must benefit from the trading in order for them to do that
.
The following example presents a hypothetical example of two countries: Japan a
nd China both producing fish and cloth, and assuming labor is the only input.
---- Output per worker per day in either fish or cloth----
------------------- Japan----------China-----------------------
fish------------------8-------------4----------------------------
Cloth----------------4 -------------3---------------------------
Japan has absolute advantage in producing both fish and cloth because one worker
can produce more of either goods in Japan.
Absolute advantage is determined by comparing the absolute productivity in diff
erent countries of producing each good.
It seems that there is no need for Japan to trade because Japan can produce bot
h more of both goods.
However, absolute advantage is not the critical consideration. What matters is c
omparative advantage.
Comparative advantage is determined by comparing the opportunity cost of each go
od in different countries.
It is measured by what must be given up in producing one good using the same res
ource, like one worker per day.
For our example:
Japans opportunity cost of producing 1 unit of fish (in terms of cloth given up)
= 4/8=0.50
Chinas opportunity cost of producing 1 unit of fish (in terms of cloth given up)
= = 0.75

Since Japans opportunity cost is lower, Japan has comparative advantage on fish p
roduction and will export fish.
The comparative advantage of cloth is found the same way.
Japans opportunity cost of producing 1 unit of cloth (in terms of fish given up)
= 8/4 = 2
Chinas opportunity cost of producing 1 unit of cloth (in terms of fish given up)
= 4/3 = 1.33

Chinas comparative advantage is on cloth production because China has a lower opp
ortunity cost.
China should export cloth and import fish from Japan instead of fishing itself.
Opportunity cost, which is reflected in the comparative advantage, is the key t
o international trading.
We benefit from trade if we are able to obtain a good from a foreign country by
giving up less than we would have to give up to obtain the good at home.