1. Absolute v. Comparative Advantage
Two countries: Bolivia and Canada

2. Goods
Two goods: Chairs and Sweaters
One resource: hours of labor

3. Absolute advantage: The ability to produce something using fewer resources than other producers use
CANADA
BOLIVIA
HOURS OF LABOR NEEDED TO PRODUCE 1
1 Sweater
5 hrs
8 hrs
1 Chair
20 hrs
24 hrs
Canada has absolute advantage in producing sweaters
Canada has absolute advantage in producing chairs

4. Comparative Advantage
The ability to produce something at a lower opportunity cost than other producers face

5. Determining comparative advantage
How much does it cost to produce 1 chair?
The cost will be in terms of sweaters that could have been produced in the same amount of time as 1 chair
For Bolivia, how many sweaters could have been produced in 24 hours?
For Canada, how many sweaters could have been produced in 20 hours?

6. Determining comparative advantage
CANADA
BOLIVIA
Cost of producing 1 chair in terms of sweaters
1 Chair
4 sweaters
3 sweaters
Bolivia has comparative advantage in producing chairs because it would mean having to give up fewer sweaters

7. Determining comparative advantage
How much does it cost to produce 1 sweater?
The cost will be in terms of (fraction of) a chair that could have been produced in the same amount of time as 1 sweater

8. Opportunity cost of 1 sweater
CANADA
BOLIVIA
Cost of producing 1 sweater in terms of chairs
1 Sweater
¼ chair
1/3 chair
Canada has comparative advantage in producing sweaters because it would mean having to give up fewer chairs

9. Law of comparative advantage
The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good.
David Ricardo