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I already read and ask NOT about pp 52-54, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw. I understand such numerical examples that corroborate Comparative Advantage, but how can I intuit comparative advantage? I wish to quash my need to revisit these numerical examples to recollect this idea. i start with definitions from pp 52 and 53 (supra):

absolute advantage = the ability to produce a good using fewer inputs than another producer

comparative advantage = the ability to produce a good at a lower opportunity cost than another producer

I read this by Prof Steven M. Suranovic and understand the gardening example, but still lack intuition.

First, ... comparative advantage is clearly counter-intuitive. ... Secondly, the theory is easy to confuse with ... the theory of absolute advantage. The logic behind absolute advantage IS quite intuitive. This confusion between these two concepts leads many people to think that they understand comparative advantage when in fact, what they understand is absolute advantage.

However, instead of assuming, as Adam Smith did, that England is more productive in producing one good and Portugal is more productive in the other; [David] Ricardo assumed that Portugal was more productive in both goods. Based on Smith's intuition, then, it would seem that trade could not be advantageous, at least for England.

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2 Answers 2

A classic example is to consider the question

Why doesn't Tiger Woods mow his own lawn?

Woods is an excellent golf player. But he also may be excellent at mowing. Still, if he devotes time to mow the lawn he sacrifices time playing golf, in which he is much more productive.

A gardener whose only skill is mowing lawns sacrifices nothing in order to do it, so even though Tiger Woods may be better at it (i.e. has an absolute advantage), the gardener has a comparative advantage.

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Let's look at two companies capable of producing gemstones.

Company A has machinery that produces quartz gemstones which it can sell at \$100/stone. It costs $10/stone in raw materials and \$20/stone in operating costs to produce the stones.

Company B has uses different machinery, but also produces quartz gemstones with identical \$100/stone sales and identical \$10 + \$20 cost structure per stone.

So the companies have the same absolute competitive advantage.

However, Company B's machines are more flexible, and can be used to produce diamonds instead of quartz. Here, the diamonds sell for \$10,000/stone and cost a total of \$1,000 in cost to make. Company A's machines are specialized so they can only be used to produce quartz or cheaper and less profitable gemstones.

Company B is much better off producing diamonds than quarts. So the opportunity cost of producing quartz is very high for that Company. By contrast, Company A's opportunity cost is very low.

So Company A has a comparative competitive advantage over Company B, both by definition and also, hopefully, by intuition.

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