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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 law of demand
Saba Reply
Actually I don't know the meaning but the law stated will give you an idea about the meaning and the law of demand state that 'the higher the price of a commodity the lower the quantity demanded and the lower the price of a commodity the higher the quantity demanded'.
Evans
"price of the commodity is inversely proportional to the quantity demanded"
Anisha
the law of demand states all other things being equal the higher the price of the commodities the lower the quantity is demanded and the vice versa
Emmanuel
what is perfectly inelastic demand and perfectly elastic demand
joe
perfectly inelastic demand refers completely zero elastic demand. that means the degree of responsiveness to a proportionate change in price is zero. no change!
Elvis
what is supply and demand curve
Zabihullah
while perfectly elastic demand refers to an arbitrary change in in the quantity demanded as result of a percentage in price. it is also known as completely elastic demand
Elvis
5 different definitions of economics
Emmanuel Reply
Simon
Simon
Economic is a social science which studies human behaviour as a relationship between ends and scarce means which have alternative uses, by Prof. Robbins
Evans
what is law of demand
Saba
what is demand elasticity?
vikas
law of demand is
Jon
five different definitions of economics
Emmanuel Reply
what are some of the pitfalls of scientific thinking?
Yakubu Reply
principles of microeconomics
Evans Reply
what is economics
deepakraj Reply
economic is a branch of science which deals with the production,consumption and distribution of goods and services in an economy.
The
economics as a social science
Deep Reply
because it uses scientific method to build the theory that can help explain human behaviour
Boadi
what is competitive demand
joe
ok
Samuel
***goo.gl/search/What+is+competitive+demand What is competitive demand? definition and meaning ... A state of affairs observed between the markets for goods that can readily be substituted for one another. For example, in a competitive demand situation faced by a business, a prospective buyer c
Samuel
hello
Zabihullah
what is price line
Zabihullah
Economics as a social science Discuss
Sire Reply
problems fcaed by economist
Fatumah Reply
what is the meaning of Dumping
Stephen Reply
Normally the independent variable is plotted on the x-axis. but in economics price which is an independent variable is plotted on y-axis. why ?
Aimal
what is cost
Deepon Reply
Cost is the amount of capital spent on purchasing an item. Or the amount of expenditure incurred in producing a product or rendering service.
Acid
describe the features of micro economics with suitable example
Purusoth Reply
what is economics
ZELISAH Reply
According to Mankiw it is the management of scarce resources.
Aimal
economics it is a science that study human behaviour as a relationship between end and scarce means which alternative uses
Kpalam
Give more definitions for economics
Stephen
economic is the study of allocation of scarce resources to meet unlimited human wants
Boadi
what is complementary demand
joe
what is the economic implications of recent imposition of charges or taxes on Nigerian depositors by central bank of Nigeria
mohammed
so what should a nation do to minimize scarcity?
Andrew Reply
is there any difference between firm and industry under monopoly
Dipsikha Reply
I think firms come together to form industry
Stephen
There is a well known saying in economics that "there is no such thing as a free lunch". Discuss. Guys any answer
Ernest

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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