Specialization and Comparative Advantage

Theory of comparative advantage: David Ricardos theory that

specialization and free trade will benefit all trading parties, even those that
may be absolutely more efficient producers.
Stated another way:
The individual, firm, region, or country with the lowest opportunity cost of
producing a particular good should specialize in producing that good.
Scenario - Weekly requirements for you and your roommate

One three paged typed paper due by each of you

You and your roommate have shirts to iron
You and your roommate are the only producers
You each have 1 hour to type your paper and iron shirts
The three paged typed paper is your #1 priority

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Your skills
hour to type paper
1 shirt in 10 minutes

Producer
You
Roommate
Total

Your roommates skills

1 hour to type paper
1 shirt in 5 minutes

Output/Hour
Each does own
Specialization
Paper
Shirt
Paper
Shirt
1
3
2
0
1
0
0
12
2
3
2
12

Absolute advantage: The ability to produce something using fewer resources than
others produce.
You have an absolute advantage typing a paper because you use only a half hour of
a resource (labor) compared to an hour of your roommates.
Your roommate has an absolute advantage ironing shirts because your roommate
uses only 5 minutes of a resource (labor) compared to 10 minutes of yours.
Comparative advantage: The ability to produce something at a lower opportunity
costs than other producers face.
You have a comparative advantage typing a paper because your opportunity costs of
typing a paper is 3 ironed shirts while your roommates opportunity costs of typing
a paper is 12 shirts.
Your roommate has a comparative advantage ironing the shirts because your
roommates opportunity costs of ironing a shirt is 1/12 of a paper while your
opportunity costs of ironing a shirt is 1/3 of a paper.

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What if

This is Similar to U.S. vs. Third World

Your skills
hour to type paper
1 shirt in 10 minutes

Producer
You
Roommate
Total

Your roommates skills

1 hour to type paper
1 shirt in 12 minutes

Output/Hour
Each does own
Specialization
Paper
Shirt
Paper
Shirt
1
3
2
0
1
0
0
5
2
3
2
5

Absolute advantage: The ability to produce something using fewer resources than
others produce.
You have an absolute advantage typing a paper because you use only a half hour of
a resource (labor) compared to an hour of your roommates.
You have an absolute advantage ironing shirts because you use only 10 minutes of a
resource (labor) compared to 12 minutes of your roommates.
Comparative advantage: The ability to produce something at a lower opportunity
costs than other producers face.
You have a comparative advantage typing a paper because your opportunity costs of
typing a paper is 3 ironed shirts while your roommates opportunity costs of typing
a paper is 5 shirts.
Your roommate has a comparative advantage ironing the shirts because your
roommates opportunity costs of ironing a shirt is 1/5 of a paper while your
opportunity costs of ironing a shirt is 1/3 of a paper.

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