This is a key idea with international trade. Â This involves what is known as comparative advantage.
let's say country A can produce a ton of soybeans in 4 hours and a ton of corn in 2 hours. Â While country B can produce a ton of soybeans in 15 hours and a ton of corn in 5 hours. Â
Looking at this set up you can see that country A can produce both corn and soybeans faster, so they have an absolute advantage in both!
However what trade is based on is opportunity cost. Â So if we think about how much corn country A has to give up to produce soybeans, they have to divert a total of 4 hours from corn to soy beans to produce one ton of soy beans. Â That 4 hours could be used to produce 2 tons of corn (since 2 hours for 1 ton and we're taking away 4 hours!). Â So opportunity cost of soybeans in country A is 2 corn.
In country B they would need a total of 15 hours to produce one extra ton of soybeans, but those 15 hours could instead be used to produce 3 tons of corn (5 hours per ton and we're stealing 15 total hours). Â That means country B's opportunity cost is 3 corn.
Since A has a lower opportunity cost in produce soybeans they will specialize and B will specialize in corn. Â
