Comparative Advantage Calculator

The comparative advantage calculator illustrates the comparative advantage of trading countries due to natural resources and technological skills.

What Is Comparative Advantage?

“The Comparative advantage is the economic capability of a country to produce a product at a lower opportunity cost as compared to its trading partners”

The comparative advantage describes how much a country can benefit as compared to its competitors in International trade. You can calculate the opportunity cost of country A while trading with country B using the comparative advantage calculator. 

How to Calculate Comparative Advantage?

The comparative advantage formula is:

Comparative Advantage = Output per unit labor for good A / Output per unit labor for good B

The labor cost and technological advantage are the major comparative advantage factors.

Why Calculate Comparative Advantage?

Comparative advantage is the financial or monetary advantage of one country due to natural or technological resources.

• The comparative advantage is a critical matrix to identify the actual benefits of importing or exporting certain products.
• The superiority of a country in the production of certain products or services. 

The products can be high-tech instruments agri or medical products etc. The comparative advantage calculator is a good resource for analyzing which country has the edge in the production of certain goods. The opportunity cost is a competitive advantage to produce a product in a lesser amount to grab more clients.

Practical Example:

Let’s suppose country X has the production cost of goods A and B are $35 and $15 respectively. Country Y has the production cost of goods A and B are $45 and $25 respectively. Then how to find comparative advantage of countries A and B.

Given:

Country X:

Product cost of good A = $ 35

Product cost of good B = $ 15 

Country Y:

Product cost of good A = $ 45

Product cost of good B = $25

The comparative advantage of Country X =?

The comparative advantage of Country Y =?

Solution

Country X

The comparative advantage equation is:

Comparative Advantage = cost for  good cost for good B

Comparative Advantage = 35 / 15

Comparative Advantage = 2.33

Therefore,

The comparative advantage for good B is 2.33 (good A)

Comparative Advantage = Cost for good B / Cost for good A

Comparative Advantage = 15 / 35

Comparative Advantage = 0.43

So,

Comparative advantage for good A 0.43 (good B)

Country Y:

Then how to determine comparative advantage of country Y

Comparative Advantage = Output per unit labor for good A / Output per unit labor for good B

Comparative Advantage = 45 / 25

Comparative Advantage = 1.8

Therefore,

Comparative advantage for good B 1.8 (good A)

Comparative Advantage = Output per unit labor for good B / Output per unit labor for good A

Comparative Advantage = 25 / 45

Comparative Advantage = 0.56

So,

Comparative advantage for good A 0.56 (good B)

Working of Comparative Advantage Calculator:

To figure out the comparative advantage of countries by the absolute advantage calculator follow the steps below:

Input:

• Enter country X output per unit cost for products A and B
• Enter country Y output per unit cost for products A and B
• Tap calculate

Output: 

• The comparative advantage of Country X
• The comparative advantage of Country X
• Step-by-step calculations

FAQs:

How to Calculate Absolute Advantage?

The absolute advantage, uncontested ability, or the superiority of a country to produce a particular good is better. To detect the absolute advantage of a country use the absolute advantage calculator. An absolute advantage can create a monopoly for a country in the production of certain products.  A country with an absolute advantage can severely damage international trade.

What are the Assumptions for Calculating Comparative Advantage?

The theory of comparative advantage is based on several key assumptions. These include the assumption of two countries producing two goods, fixed resources, and technology, no transportation costs, and the ability to trade freely without barriers or restrictions. 

What are the Limitations of Comparative Advantage? 

While comparative advantage calculation is a valuable concept, it has its limitations. It assumes that resources are fully employed, disregards factors such as income distribution and inequality, neglects the impact of non-traded goods and services and assumes that the factors determining comparative advantage remain constant over time. 

References:

From the source of investopedia.com: Comparative advantage

From the source of wallstreetmojo.com: What is CA?, How to find Comparative advantage?