Comparative Advantage and Trade

Specialization

Specialization occurs when each country produces the product for which it has a comparative advantage, leading to maximized output.

A discussion of comparative advantage leads to the concept of specialization, which is a firm's (or individual's) choice to produce the good or service for which it has lower opportunity costs. When two people, businesses, or countries can produce similar goods with different opportunity costs, they can benefit from specialization. One producer will have a lower opportunity cost for one good than another good, while the other producer has the opposite situation. Each producer can focus on producing the good for which it has the lower opportunity cost, which will boost the producers' combined output and boost revenues for both parties.

Alice and Becca both manufacture doorframes and clocks. Alice takes 12 hours to produce 1 clock and 6 hours to produce 1 doorframe each. Becca takes 8 hours to produce 1 clock and 2 hours to produce 1 doorframe. Each of them has 2,400 labor hours to spend. If each spent half of their labor time (1,200 hours) producing each product, Alice will make 100 clocks and 200 doorframes, while Becca will make 150 clocks and 600 doorframes. Both of them working together make 250 clocks and 800 doorframes—1,050 total units.

Manufacturing without Specialization

Total Output (without Specialization)
Clocks Doorframes
Alice 100 200
Becca 150 600
Total 250 800

Without specialization, Alice and Becca make a total of 1,050 units.

When two economic agents produce similar goods with different opportunity costs (i.e., they respectively give up different amounts of one good to produce another good), they can benefit from specialization and trade. Utilizing specialization, each producer can focus on producing their lower-opportunity-cost goods, which will boost their combined output and increase revenues for both parties.

If Alice specializes (focuses her time and resources) in producing clocks and Becca specializes in doorframes, they can produce a higher total quantity of goods. Instead of making both clocks and doorframes, Alice produces 200 clocks and no doorframes, and Becca produces 1,200 doorframes and no clocks. Because of specialization, the end result would be 200 clocks and 1,200 doorframes—1,400 total units. Becca and Alice increase their total productivity through specialization. In most cases, parties can fully specialize and still maintain the current supply.

Manufacturing with Specialization

Total Output (with Specialization)
Clocks Doorframes
Alice 200 0
Becca 0 1,200
Total 200 1,200

When Alice and Becca both specialize, their total output is 1,400 units. Their total production has increased.