Comparative advantage.md

Suppose there are two countries - Home and foreign (foreign represented by $*$). Each country produces two goods - Clothes and Food Both the countries are in Autarky - No trade situation

Suppose the prices of the goods in Home and Foreign is represented by - $P_F^A, P_C^A, P_F^A*, P_C^A*$ In the Autarky equilibrium, if the case is that $$\frac{P_F^A}{P_C^A}<\frac{P_F^A*}{P_C^A*}$$This means that the relative price of Food to clothes in the foreign country is greater than the relative price of food to clothes in the home country.

If the relative price of food in country A is lower than in country B, and the system is in Autarky equilibrium, than country A has a comparative advantage in the production of food.

In this example, the home country has a comparative advantage in the production of food.

By transposing the condition, $$\frac{P_C^A*}{P_F^A*}<\frac{P_C^A}{P_F^A}$$This implies that the foreign country also has a comparative advantage in clothes production. It is impossible for a country to have a comparative advantage in both goods.