Comparative advantage and opportunity cost

Discussion guide

After you’ve watched this video with your students, use this guide to explore key concepts, check for comprehension and lead a discussion.

Key concepts

• When you choose between options, the opportunity cost is what you give up by not choosing the alternative.
• When an individual or company specializes in providing a particular good or service, they have a comparative advantage in trade. Comparative advantage allows them to gain from trade by lowering opportunity costs. This can also increase productivity.
• Even if a country can produce many things well, it still benefits from trading. By trading with others, all countries involved can end up with a wider range of goods and services.

Comprehension check

Ask the following questions.

How does the choice of fruit harvesting help explain opportunity cost?

Opportunity cost is the value of what you give up when you choose one thing over another.

In the video, Mark can choose to pick either apples or oranges. When Mark chooses to pick apples, the opportunity cost is not picking oranges. Since he can pick the same amount of oranges or apples in a day, the opportunity cost for Mark of picking 10 apples is 10 oranges.

Lucy has the same decision and opportunity costs to consider, but she is much more efficient at picking oranges than apples. When Lucy chooses to pick one apple, her opportunity cost is giving up three oranges.

What do both Mark and Lucy do to maximize the benefits of trade?

While Lucy is strong at picking both apples and oranges, she has a comparative advantage in picking oranges because her opportunity cost is lower: she can choose to pick a lot more oranges in the same time that it would take her to pick apples. It also benefits her to specialize in picking only oranges, so she can trade with Mark to get his apples. And Mark benefits from this comparative advantage because then Lucy can trade with him for his apples.

This change means they do not have to increase the total time worked or their effort. Simply changing how they divide their tasks allows both of them to end up with more fruit.

How does comparative advantage work on a global scale?

A country, business or individual has a comparative advantage when producing a good or service at a lower opportunity cost than another can.

Like Lucy, a country may be good at producing many things. But when it chooses to specialize in one good or service and trade that with another country for a different one, both countries end up with more in the end.

If a country is productive at making everything, why would it still benefit from trade?

Even if a country is productive in many industries, opportunity cost still matters. By specializing in the goods or services it is relatively best at, a country can use its resources more efficiently and trade for goods and services from other countries. This is the heart of comparative advantage—you gain from trade by specializing wisely and therefore lowering opportunity costs.

Group discussion

Ask the following questions.

1. What is the opportunity cost of a decision you had to make recently?
2. Describe the comparative advantage of a person (or company) you know. What sets them apart from others?
3. What are some Canadian specializations that give the country a comparative advantage when trading internationally? What international specializations do we rely on from other countries?