One person has an absolute advantage over another in the production of a good if she can produce more of that good than the other person. One person has a comparative advantage over another in the production of a good if she is relatively more efficient than the other person at producing that good, meaning that her opportunity cost of producing it is lower than her counterpart's. Specialization based on comparative advantage is the basis for economic exchange. When each person specializes in the task at which he or she is relatively most efficient, the economic pie is maximized, making possible the largest slice for everyone.
At the individual level, comparative advantage may spring from differences in talent or ability or from differences in education, training, and experience. At the national level, sources of comparative advantage include these innate and learned differences, as well as differences in language, culture, institutions, climate, natural resources, and a host of other factors.
The production possibilities curve is a simple device for summarizing the possible combinations of output that a society can produce if it employs its resources efficiently. In a simple economy that produces only coffee and nuts, the PPC shows the maximum quantity of coffee production (vertical axis) possible at each level of nut production (horizontal axis). The slope of the PPC at any point represents the opportunity cost of nuts at that point, expressed in pounds of coffee.
All production possibilities curves slope downward because of the scarcity principle, which states that the only way a consumer can get more of one good is to settle for less of another. In economies whose workers have different opportunity costs of producing each good, the slope of the PPC becomes steeper as consumers move downward along the curve. This change in slope illustrates the principle of increasing opportunity cost (or the low-hanging-fruit principle), which states that in expanding the production of any good, a society should first employ those resources that are relatively efficient at producing that good, only afterward turning to those that are less efficient.
Factors that cause a country's PPC to shift outward over time include investment in new factories and equipment, population growth, and improvements in knowledge and technology.
The same logic that prompts individuals to specialize in their production and exchange goods with one another also leads nations to specialize and trade with one another. On both levels, each trading partner can benefit from an exchange, even though one may be more productive than the other, in absolute terms, for each good. For both individuals and nations, the benefits of exchange tend to be larger the larger are the differences between the trading partners' opportunity costs.
