Question

9. A friend tells you the following: “Free trade sounds good, but a country like Honduras doesn’t have any comparative advantage compared to the U.S.” Explain to your friend what comparative advantage means, and the error in his thinking.

Answer 1

Suppose Honduras can make 100 computers with 6 hours of labour and assemble 75 phones with 1 hour of labour. Whereas U.S. can make 250 computers with 6 hours of labour and assemble 100 phones with 1 hour of labour. In this aspect, clearly US has an absolute advantage in production of both the products.

However, US can either make 1000 computers or assemble 2400 phones in 24 hours. Honduras, on the other hand, can make 400 computers or assemble 1800 phones in 24 hours. The US has a greater advantage in focussing resources on making computers as it is 2.5 times more efficient than Honduras while Honduras should focus on assembly of phones. The error in thinking here is forgetting that the resources (in this example, time) are scarce and comparative advantage allows maximization of total production rather than one country producing everything.