production. If Mexico, instead, produces more shoes and then trades for refrigerators made in the United

States, where the opportunity cost of producing refrigerators is lower, Mexico can in effect take advantage of

the lower opportunity cost of refrigerators in the United States. Conversely, when the United States specializes

in its comparative advantage of refrigerator production and trades for shoes produced in Mexico, international

trade allows the United States to take advantage of the lower opportunity cost of shoe production in Mexico.

The theory of comparative advantage explains why countries trade: they have different comparative

advantages. It shows that the gains from international trade result from pursuing comparative advantage and

producing at a lower opportunity cost. The following Work It Out feature shows how to calculate absolute and

comparative advantage and the way to apply them to a country’s production.

WORK IT OUT
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