What is 

Comparative Advantage
Formula?
The comparative advantage formula is an economic factor that calculates the
comparative advantage between two countries producing the same goods in their own
countries. On an absolute basis, a country can produce more of a particular good than
the quantity produced for the same good in another. But that does not imply that the
country that produces more goods on an absolute basis has an advantage over other
countries. Therefore, it is important to understand the opportunity cost for producing
other wells to find an advantage comparatively.

David Ricardo developed the equation for calculating comparative advantage in

1817. It is calculated by finding the opportunity cost for a set of goods. Suppose two
neighboring countries produce two sets of similar goods. So to find out the
comparative advantage for those two goods, we need to find out the opportunity
cost for producing one good over the other good as the number of skilled labor is
the same. Comparative advantage is calculated as

Comparative Advantage = Quantity of Good A for Country X / Quantity of

Good B for Country X

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This formula will help us calculate the opportunity cost for product A; similarly, we
need to calculate the opportunity cost for product B. We will do that for both
countries. We will be able to determine the comparative advantage of a particular
good for a country compared to others by looking at the product of the formula.

Examples of Comparative
Advantage Formula
Let’s see some simple to advanced examples of Comparative Advantage Equation
to understand it better.
You can download this Comparative Advantage Formula Excel Template here – Comparative Advantage
Formula Excel Template

Example # 1
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Let us try to understand the concept of comparative advantage with the help of an
example. Suppose the two neighboring countries, Italy and France, produce wine
and manufacture clothes. Let us try and find out which country has a comparative
advantage over the other for these two goods. The quantity of each good for each
country is presented below. For Italy, the opportunity cost for producing wine is 1.28
yards of cloth, and the opportunity cost for manufacturing a yard of cloth will be .82
bottles of wine. For France, the opportunity cost for producing wine is .86 yards of
cloth, and the opportunity cost for manufacturing a yard of cloth will be 1.17 bottles
of wine. On an absolute basis, Italy produces a higher quantity of both goods. But on
a comparative basis, the opportunity cost for producing a cloth concerning wine is
lesser, so Italy should produce more cloth. Similarly, on a comparative basis for
France, the opportunity cost for producing wine concerning cloth is lesser, so Italy
should produce more wine.

Below is given data for the Calculation of the Comparative Advantage formula.

Suppose Italy ends up producing only cloth as Italy has the comparative advantage
of producing cloth over France, and France ends up producing only wine as France
has the comparative advantage of producing cloth over Italy. Let us see how that will
increase the total economic output for both countries.

Suppose Italy has seven working days and France has nine worker days.

Calculation of Italy’s Quantity of Wine

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The quantity of wine produced will be -7*430

=-3010

Calculation of Italy’s Quantity of Cloth

The number of yards of cloth manufactured will be 7*550

=3850

Calculation of France’s Quantity of Wine

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The quantity of wine produced will be 9*350

=3150

Calculation of France’s Quantity of Cloth

The number of yards of cloth manufactured will be -9*300

=-2700

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So the net result for the output for these goods for these two countries will be
higher production of wine by (-3010+3150) = 140 bottles of wine and (3850-2700) =
1150 yards of cloth.

Example # 2
Oil-producing countries like countries that are part of OPEC have a comparative
advantage for producing a lot of chemicals. Many chemicals are by-products of
crude oil for which they have huge reserves. So a country that is producing crude has
a comparative advantage over a country that is not producing crude in terms of
manufacturing chemicals.

Example # 3
A country like India has a huge comparative advantage compared to the western
country in terms of the outsourcing industries. Since India has a huge population of
young educated English-speaking people, this acts as an advantage to provide scale
and price competitiveness, resulting in a lot of work being outsourced in India.

Relevance and Use of Comparative

Advantage Formula
It is important to figure out the comparative advantage for goods among countries.
Countries produce goods in the region or country with a higher comparative
advantage due to labor, population, or the overall ecosystem. As we have seen in the
example above, if counties produce based on their comparative advantages, then
the total output in the economy for both countries can be higher. In a way, it
enhances the chance of much improved global trade between the two countries. In
today’s age of It is important to figure out the comparative advantage for goods
among countries. As we have seen in the example above that if counties produce on
the basis of their comparative advantages then the total output in the economy for
both countries can be higher. This in a way enhances the chance of the much
improved global trade between the two countries. In today’s age of globalization,
comparative advantage plays a major role.

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