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By the end of this section, you will be able to:

  • Show the relationship between production costs and comparative advantage
  • Identify situations of mutually beneficial trade
  • Identify trade benefits by considering opportunity costs

What happens to the possibilities for trade if one country has an absolute advantage in everything? This is typical for high-income countries that often have well-educated workers, technologically advanced equipment, and the most up-to-date production processes. These high-income countries can produce all products with fewer resources than a low-income country. If the high-income country is more productive across the board, will there still be gains from trade? Good students of Ricardo understand that trade is about mutually beneficial exchange. Even when one country has an absolute advantage in all products, trade can still benefit both sides. This is because gains from trade come from specializing in one’s comparative advantage.

Production possibilities and comparative advantage

Consider the example of trade between the United States and Mexico described in [link] . In this example, it takes four U.S. workers to produce 1,000 pairs of shoes, but it takes five Mexican workers to do so. It takes one U.S. worker to produce 1,000 refrigerators, but it takes four Mexican workers to do so. The United States has an absolute advantage in productivity with regard to both shoes and refrigerators; that is, it takes fewer workers in the United States than in Mexico to produce both a given number of shoes and a given number of refrigerators.

Resources needed to produce shoes and refrigerators
Country Number of Workers needed to produce 1,000 units — Shoes Number of Workers needed to produce 1,000 units — Refrigerators
United States 4 workers 1 worker
Mexico 5 workers 4 workers

Absolute advantage simply compares the productivity of a worker between countries. It answers the question, “How many inputs do I need to produce shoes in Mexico?” Comparative advantage asks this same question slightly differently. Instead of comparing how many workers it takes to produce a good, it asks, “How much am I giving up to produce this good in this country?” Another way of looking at this is that comparative advantage identifies the good for which the producer’s absolute advantage is relatively larger, or where the producer’s absolute productivity disadvantage is relatively smaller. The United States can produce 1,000 shoes with four-fifths as many workers as Mexico (four versus five), but it can produce 1,000 refrigerators with only one-quarter as many workers (one versus four). So, the comparative advantage of the United States, where its absolute productivity advantage is relatively greatest, lies with refrigerators, and Mexico’s comparative advantage, where its absolute productivity disadvantage is least, is in the production of shoes.

Mutually beneficial trade with comparative advantage

When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. Again, the production possibility frontier is a useful tool to visualize this benefit.

Questions & Answers

what is scarcity? pls help
Mikateko Reply
what is distribution
umar Reply
1.what is distribution? 2.what are factors affecting distribution? 3.releat what you are writing in the contest of economics and Nigeria situation
umar
what is demand
Obianyido Reply
The market for you In Ilorin has the following demand and supply equation Qd + 5p =9520 Qs =2.5p - 125 a) determine the equation price and quantity b) Explain the situation when the market price is below the equlibrum price
Rasheee Reply
solutions
Alex
What is scale of preference
Richmond Reply
Pls what is scale of preference
Richmond
scale of preference is a arrangement of individual wants in order of priority
Lamina
the arrangement of people want inoder of demand
Ada
explain whether decisions in microeconomics involve an opportunity cost
Sonali Reply
What is primary activity
Yeboah Reply
indigenization is the dominance or influence of people native in a particular place or
Ada
what's indigenization?
Enoch Reply
fine
Ifeanyi
first
Ifeanyi
What is economics?
Penuel Reply
economics is a social science which studies of human behaviour as a relationship between end and scores which have antanetuve use
IDRIS
economics is the study of complicated tables and chart, statistics and numbers but more specifically it is the study of what constitute human rational behavior in endeavor to fulfill human needs and want
Rosemary
what are the five laws of demand
Uleme Reply
the ppc curve slopes down due to Central problem of economy.......
SHADAB
what is economic by James Stewart
Emma
what is economic
Okechukwu Reply
Economics is a science of wealth
Taur
hi
scor
what is economic and what is the definition
scor
economic is science and arts both........
SHADAB
to me is a science which study human behavior as a relationship between ends and scare which have alternative use
Ada
economic is a science which study human and environment
Akor
Explain any five limitation to division of labour
Aliyu Reply
production
Abddeeyat
size of the market. for example..let's take a look at a barbing saloon. the number of hands needed there isnt up to the one needed in a company or production line because the number of people the barbing saloon is serving cant be up to the ones of the company
Abisola
Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are: What to produce?How to produce?For whom to produce?What provisions (if any) are to be made for economic growth?
Yusuf Reply
what is the basic economic problem
Arnold Reply
what is the basic problem
Arnold
importance of elasticity of demand
Ayuk Reply
what nature is price elasticity
Ayuk
nature of price elasticity
Ayuk
is it de basic economic problem
Arnold
Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are: What to produce?How to produce?For whom to produce?What provisions (if any) are to be made for economic growth?
Yusuf
All teachers economic development
HASSAN

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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