The Principle of Comparative Advantage: A Real-Life Example

The Blue country and the Green country both produce hand guns and hard liquor (perfect complements). Consider their production possibilities (see the PPC diagram to the right [click on the thumbnail for a larger diagram]) and answer the following questions.

1. Complete the following table:

  Opportunity Costs
  Hand Guns Hard Liquor
Blue 3 Liquors 1/3 Guns
Green 1 Liquors 1 Guns

2. According to the principle of comparative advantage, which country should specialize in producing hand guns for export?

Green

3. According to the principle of comparative advantage, which country should specialize in producing hard liquor for export?

[Answer]