Comparative advantage and trade – two countries, two goods
GeographyGlobal Economy & DevelopmentAges 16–17
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Sign in to playCountries A and B both make cloth and wheat, but need different numbers of labour hours per unit. Production possibility frontiers show what each country can make on its own; students choose how labour is split between the goods, how much to export and the terms of trade, then compare output and consumption with self-sufficiency. Distinguish absolute from comparative advantage, and add transport costs or tariffs to watch the gains from trade shrink.
Lesson: Economic globalization: international trade, the international division of labour and comparative advantage
What it shows
Why do countries specialise and trade instead of making everything themselves? This Ricardian model has two countries, two goods and labour as the only input, so each production possibility frontier is a straight line. The slope gives the opportunity cost: how much wheat is given up to make one more unit of cloth. Even when one country is faster at making both goods, both can gain if each concentrates on the good with the lower opportunity cost and they trade at a ratio between the two costs. Transport costs and tariffs eat into these gains.
How to use
Set the hours per unit for each country and read the opportunity costs and advantages below the table. Use the % of labour in cloth sliders, Trade direction, Cloth exported and Terms of trade to plan a deal; the table and the diamonds on the charts show consumption against self-sufficiency. Press Suggest a win-win plan for one solution, Self-sufficiency to cancel trade, and raise Transport cost / tariff to see the gains shrink.
Parameters you can change
- Country A: hours to make 1 unit of cloth 1–20 h
- Country A: hours to make 1 unit of wheat 1–20 h
- Country B: hours to make 1 unit of cloth 1–20 h
- Country B: hours to make 1 unit of wheat 1–20 h
- Total labour hours in each country 600–3000 h
- Self-sufficiency: share of labour in cloth 10–90 %
- With trade: share of country A's labour in cloth 0–100 %
- With trade: share of country B's labour in cloth 0–100 %
- Trade direction A exports cloth, B exports wheat, B exports cloth, A exports wheat
- Cloth exported 0–1000 units
- Terms of trade (wheat for 1 cloth) 0.1–4 wheat
- Transport cost / tariff (share of goods lost) 0–50 %
Questions to explore
- Country A makes both goods faster than country B. Why can A still gain by buying wheat from B?
- Within what range must the terms of trade lie for both countries to gain?
- How high can transport costs or tariffs rise before trade stops being worthwhile for both countries?
