To produce phones, any country must use resources—land, labor, capital, and so on—that could have been used to produce other things. The potential production of other goods a country must forgo to produce a phone is the opportunity cost of that phone.

In some cases, it’s easy to see why the opportunity cost of producing a good is especially low in a given country. Consider, for example, shrimp—much of which now comes from seafood farms in Vietnam and Thailand. It’s a lot easier to produce shrimp in Vietnam, where the climate is nearly ideal and there’s plenty of coastal land suitable for shellfish farming, than it is in the United States.

Conversely, other goods are not produced as easily in Vietnam as in the United States. For example, Vietnam doesn’t have the base of skilled workers and technological know-how that makes the United States so good at producing many high-technology goods. So the opportunity cost of a ton of shrimp, in terms of other goods such as aircraft, is much less in Vietnam than it is in the United States.

In other cases, matters are a bit less obvious. It’s as easy to assemble smartphones in the United States as it is in China, and Chinese electronics workers are, if anything, less efficient than their U.S. counterparts. But Chinese workers are a lot less productive than U.S. workers in other areas, such as automobile and chemical production. This means that diverting a Chinese worker into assembling phones reduces output of other goods less than diverting a U.S. worker into assembling phones. That is, the opportunity cost of assembling phones in China is less than it is in the United States.

Notice that we said the opportunity cost of assembling phones. As we’ve seen, most of the value of a “Chinese made” phone actually comes from other countries. For the sake of exposition, however, let’s ignore that complication and consider a hypothetical case in which China makes phones from scratch.

So we say that China has a comparative advantage in producing smartphones. Let’s repeat the definition of comparative advantage from Chapter 2: A country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries.

Figure 5-2 provides a hypothetical numerical example of comparative advantage in international trade. We assume that only two goods are produced and consumed, phones and Ford trucks, and that there are only two countries in the world, the United States and China. The figure shows hypothetical production possibility frontiers for the United States and China.

As in Chapter 2, we simplify the model by assuming that the production possibility frontiers are straight lines, as shown in Figure 2-1, rather than the more realistic bowed-out shape shown in Figure 2-2. The straight-line shape implies that the opportunity cost of a phone in terms of trucks in each country is constant—it does not depend on how many units of each good the country produces. The analysis of international trade under the assumption that opportunity costs are constant, which makes production possibility frontiers straight lines, is known as the Ricardian model of international trade, named after the English economist David Ricardo, who introduced this analysis in the early nineteenth century.

In Figure 5-2 we show a situation in which the United States can produce 100,000 trucks if it produces no phones, or 100 million phones if it produces no trucks. Thus, the slope of the U.S. production possibility frontier, or PPF, is −100,000/100 = −1,000. That is, to produce an additional million phones, the United States must forgo the production of 1,000 trucks.

Similarly, China can produce 50,000 trucks if it produces no phones or 200 million phones if it produces no trucks. Thus, the slope of China’s PPF is −50,000/200 = −250. That is, to produce an additional million phones, China must forgo the production of 250 trucks.

Economists use the term autarky to refer to a situation in which a country does not trade with other countries. We assume that in autarky the United States chooses to produce and consume 50 million phones and 50,000 trucks. We also assume that in autarky China produces 100 million phones and 25,000 trucks.

The trade-offs facing the two countries when they don’t trade are summarized in Table 5-1. As you can see, the United States has a comparative advantage in the production of trucks because it has a lower opportunity cost in terms of phones than China has: producing a truck costs the United States only 1,000 phones, while it costs China 4,000 phones. Correspondingly, China has a comparative advantage in phone production: 1 million phones costs only 250 trucks, while it costs the United States 1,000 trucks.

As we learned in Chapter 2, each country can do better by engaging in trade than it could by not trading. A country can accomplish this by specializing in the production of the good in which it has a comparative advantage and exporting that good, while importing the good in which it has a comparative disadvantage.

Let’s see how this works.