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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
Bonny Reply
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
Bonny
needs of people ar called demand
Francis
what's the difference between opportunity cost and production possibility curve?
Francis
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
Bonny
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Abubakari
It deals with making choices in the face of scarcity
Abu
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
Bilal
what is scarcity
Bonny
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
Sean
what is perfect complements?
Bilal
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
Winny
economics is important on expenditure analysis
Umar
because it is to make choice
Puosour
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Sarah
Economic is important because of the fact of scarcity and desire for efficiency...
Ernest
it enable us to make rational choice
Osman
what is unemployment
scor
unemployment occurs when a person is actively searching for employment is unable to find work .....
Fatema
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
Lintoya
It is important because economics provide solutions about scarcity.
Pobreng
which of the following measures will the government take during inflation?
Ally
Price falls and demand is inelastic Please define it with an example and diagram.
Muhammad Reply
difference between nominal gdp and real gdp
Sakshi Reply
main is adjustment for inflation
cleophas
what are the factors of production
Sheku Reply
capital, labor, technology
Lucas
is economic a science
Emmanuel Reply
as economic a science
Emmanuel
yes because it study human behavior
Ahmed
yes it deal with human activity and the welfare of people in the country
Nsobila
yes because it uses scientific methods of solving problems
Osman
yes
Sarah
yes because it uses scientific methods in solving problems
Sarah
pls can I ask a question
Sarah
yes
Nyakeh
Pls what are the characteristics of opportunity costs
Sarah
identify the type of price elasticity of demand
Mamie
economic is a science
Azeez
what is monopoly
Issah
Is Economics a Science
Albert Reply
what is scarcity
Edmore Reply
Scarcity is the limitedness of resources relative to human wants. In economic sense means that the available resources are not sufficient to satisfy all human wants.
Innocent
Moreover, Fiscal policy deal with government revenue and expenditure. Government expenditure puts money in public hands while government revenue withdraws the money. Role of fiscal policy is to reduces money circulation as a means of reducing demand.
Innocent
What is an inflationary spiral?
Innocent
Suppose that you 're nominated as a Minister of Finance in your country's. How can you finance a deficit budget?
Innocent
is economic a science
Emmanuel
yes because we studying human behaviour
Umar
what are the factors of production
Sheku
pls Emmanuel adjei do we know each other
Hawa
Emmanuel adjei pls did u attend living God school
Hawa
Can you explain the terms 'fiscal deficit' and 'fiscal policy'?
Brahmani Reply
fiscal deficit refers to the government expenditure exceed expected to the government revenue
Innocent
fiscal deficit is like budget deficit
Innocent
fiscal policy it occurs when the government takes and maintain the strategic to resolve the inflation.
Innocent

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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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