B) Substantiation of specialization and comparative advantages

Let us now introduce the concept of comparative advantage and employ it in analyzing the basis

for international specialization and trade. An accountant could lower his cost of getting his house

painted by specializing in accounting and using some of the proceeds to hire a house painter. Similarly,

the house painter could reduce the costs of getting his tax returns completed by specializing in

painting and employing the accountant to complete his returns. The gains from specialization and

exchange occurred because the accountant had a relative or comparative advantage in accounting,

while the painter had a relative or comparative advantage in painting houses. Although the accountant

was better than the professional painter at both accounting and painting, specialization by comparative

advantage yielded advantages to each. The illustration makes clear that specialization and

trade can lower the cost of obtaining valuable products and services.

Suppose the world economy is composed of just two nations, say, the United States and Brazil.

Assume further that each is capable of producing both wheat and coffee, but at differing levels of

economic efficiency.

Given these different cost ratios, is there any rule or guideline which will tell us the products in

which the United States and Brazil should specialize? Yes, there is; The principle of comparative

advantage says that total output will be greatest when each good is produced by that nation which has