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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

discuss advantages and disadvantages of international trade.
Ram Reply
how can I ask the question here . tell me anyone plz I'm new user so kindly help here I will click ......?..🤗
ISRAR
me . I'm *
ISRAR
So kindly help me. where I will click......***
ISRAR
What are the reasons of demand pull inflation
GIRIDHARI Reply
the reasons behind pull inflation are high rate of interest
Ahmed
yes
M-H-S
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Ahmed
Thank you
GIRIDHARI
you are welcome
Ahmed
thank you
Mohamed
what is barter system
twinkel Reply
a system in which goods are exchanged for other goods
daniel
Barter system is said to be the process whereby goods are being exchange for goods
Asamoah
a system in which money have not play any role
Ramu
goods and services are exchanged .. problem is finding equitable or agreeable value for the exchange of the goods or services.. I teach maths privately and love home made cake, I decided 4 home made cakes was worth an hour of private maths 😁
jax
ok.thank u
twinkel
thanks a lot to everyone .
ISRAR
accounts in balance of trade
Kamuyu Reply
What is fiscal policy and intrest rates
Attah Reply
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
twinkel
income and expenditure
Bittu Reply
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
Rajat Reply
what is macro economics
Sarah Reply
it is study of all aggregate of all economic activities of an economic as whole.
Rajat
Macro economics is the aggregate study of national income, investment, price level, changes in economic activities, GDP and economic inflation.
Zahid
hey
Ahmed
how are you
Ahmed
thanks
Ahmed
i am find
Ahmed
what about you
Ahmed
am good bro
Ahmed
am fine
Ahmed
what is comparative and superlative advantage? give an example
Xanaan Reply
Methods used to correct trade deficits?
David Reply
what is role capitalism unemployment?
Mafsuud Reply
being unemployment look job but not achieved their being out labor force is person can't work
Mafsuud
being unemployment look job but not achieved their being out labor force is person can't work
Mafsuud
themes studied in economics include?
Patrick Reply
Financial accounting GDP and GNP
Samson Reply
can u explain
Sarah
this means that the demand curve have negative relationship with the price ..which means that when high price low demand of the product and vice versa so higher price will shirnk the demand of product
Ahsan Reply
Higher price level ∴Real value of household wealth increase ∴Net export decrease ∴More money needed, interest rate increase, investment decrease
sirius
net export decrease
Cyril
a person has 60birr to buy two commodities,x and y the price of x is four birr unit the price of y is two birr unit his utility functio given by u=xy+2x determine the budget equation
Mohammed Reply
the budget equation will be- 60 birr= 4x+2y
Ramu

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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