The key to the law of comparative advantage is opportunity cost, the value of foregone production. If very little production is foregone when a good is produced, then the opportunity cost is relatively low. As such, an extremely productive, technologically advanced nation is bound to forego a great deal of production and incur high opportunity cost to produce a given good, while a less productive, less advanced nation can produce the same good at a lower opportunity cost.

What It Means

The United States, for example, has the technology and resources to produce athletic shoes. However, it imports athletic shoes from Indonesia, which are produced at lower opportunity cost. The United States foregoes highly valuable production when using resources to produce athletic shoes and thus incurs relatively high opportunity cost. Indonesia, in contrast, foregoes less valuable production when producing athletic shoes and thus incurs relatively lower opportunity cost.

Working a Few Numbers

Two Countries, Two Goods

Both nations are able to produce two goods -- turnips and sundials. Reflecting greater production capabilities in the United Provinces of Csonda, one worker over a one month period is able to produce 60 pounds of turnips or 20 sundials. In contrast, lesser production capabilities in the Republic of Northwest Queoldiola means that one worker over a period of one month is able to produce only 20 pounds or turnips or 10 sundials.

Csonda is clearly more productive than Northwest Queoldiola. However, the law of comparative advantage indicates that Northwest Queoldiola can produce a good more cheaply that Csonda. But which good? The answer lies with the opportunity cost of producing each good.

Opportunity cost is the alternative production foregone when resources are use to produce a good. For example, when Csondan labor is used to produce sundials it is not used to produce turnips. The cost of producing sundials in Csonda is thus turnips NOT produced.

• If Csonda uses one worker to produce 20 sundials then that worker is not able to produce 60 pounds of turnips. As such, the Csondan cost of the 20 sundials is the 60 pounds of turnips and the cost of each sundial is 3 pounds of turnips.


• If Northwest Queoldiola uses one worker to produce 10 sundials then that worker is not able to produce 20 pounds of turnips. As such, the Queoldiolan cost of the 10 sundials is the 20 pounds of turnips and the cost of each sundial is 2 pounds of turnips.

Rather than producing sundials using domestic labor, Csonda is actually better off importing sundials from Northwest Queoldiola.

In contrast, Csonda has a comparative advantage in turnip production.

• If Csonda uses one worker to produce 60 pounds of turnips then that worker is not able to produce 20 sundials. As such, the Csondan cost of the 60 pounds of turnips is the 20 sundials and the cost of each pound of turnips is 1/3 sundial.


• If Northwest Queoldiola uses one worker to produce 20 pounds of turnips then that worker is not able to produce 10 sundials. As such, the Queoldiolan cost of the 20 pounds of turnips is the 10 sundials and the cost of each pound of turnips is 1/2 sundial.

Each nation has a good that it can produce at a lower opportunity cost than the other nation. The two nations can then trade these two goods for the betterment of both. Csonda can produce turnips, which it can then trade to Northwest Queoldiola for sundials. Csonda obtains sundials at a lower cost than it can produce domestically and Northwest Queoldiola obtains turnips at a lower cost that it can produce domestically. It is a comparative advantage win-win.

Why It Works

As a matter of fact, the high level of productivity in Csonda works against it when it comes to comparative advantage. The opportunity cost of producing sundials in Csonda is greater than in that in Northwest Queoldiola precisely because Csonda is more productive, more productive in the production of turnips. Because each Csonda worker can produce a lot of turnips, producing sundials rather than turnips results in a relatively high opportunity cost.

In contrast, Northwest Queoldiola is less productive in turnip production and thus foregoes fewer turnips when producing sundials, with a resulting lower opportunity cost.

The key to the law of comparative advantage, however, is not absolute productivity, but relative productivity. If one nation incurs a relatively HIGH opportunity cost when producing one good, then it necessarily incurs a relatively LOW opportunity cost when producing another good. Foregoing a lot of turnips to produce one sundial means foregoing relatively few sundials when producing turnips.

This is why EVERY nation has a comparative advantage in the production of something. EVERY nation has at least one good that it can produce at a lower opportunity cost than another nation. When comparing any two goods producing by any two nations, EACH nation necessarily is able to produce ONE of the goods at a lower opportunity cost.

This is why the law of opportunity cost works.

Beyond Foreign Trade

Consider the example of Lawrence Alexander III, the best and the brightest. Lawrence has an absolute advantage over everyone in everything he does. He is smarter, a better athlete, more skilled, and more talented than anyone.

However, in spite of, and even because of, Lawrence's documented superiority in ALL activities, he does NOT have a comparative advantage in ALL activities. His high level of productivity means that he also incurs a high opportunity cost. Others are able to provide some activities at a relatively lower opportunity cost.

For example, Lawrence, might be able to craft furniture, better than anyone else, but he actually purchases his furniture from others. He is unmatched as an actor and singer, yet he is entertained by watching others perform. He is intelligent enough to have pursued any field of academic study in college, including economics, but he did not.

In contrast to the exceptional abilities of Lawrence Alexander III, Benny Vukovich is not particularly talented, skilled, or educated. He is not particularly productive in any way. However, in spite of, and even because of, Benny's limited production capabilities, he does have a comparative advantage in the production of "odd jobs." He foregoes very little alternative production and thus has a relatively low opportunity cost when he engages in "odd job" production.

The low opportunity cost and corresponding low wage is why Lawrence hires Benny to do odd jobs, such as cleaning his rain gutters. Lawrence gives up a great deal of valuable production when he cleans gutters, Benny gives up very little. It's a win-win for both Lawrence and Benny. Benny has a job and Lawrence has clean gutters.