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The range of trades that benefit both the united states and saudi arabia
The U.S. Economy, after Specialization, Will Benefit If It: The Saudi Arabian Economy, after Specialization, Will Benefit If It:
Exports no more than 60 bushels of corn Imports at least 10 bushels of corn
Imports at least 20 barrels of oil Exports less than 60 barrels of oil

The underlying reason why trade benefits both sides is rooted in the concept of opportunity cost, as the following Clear It Up feature explains. If Saudi Arabia wishes to expand domestic production of corn in a world without international trade, then based on its opportunity costs it must give up four barrels of oil for every one additional bushel of corn. If Saudi Arabia could find a way to give up less than four barrels of oil for an additional bushel of corn (or equivalently, to receive more than one bushel of corn for four barrels of oil), it would be better off.

What are the opportunity costs and gains from trade?

The range of trades that will benefit each country is based on the country’s opportunity cost of producing each good. The United States can produce 100 bushels of corn or 50 barrels of oil. For the United States, the opportunity cost of producing one barrel of oil is two bushels of corn. If we divide the numbers above by 50, we get the same ratio: one barrel of oil is equivalent to two bushels of corn, or (100/50 = 2 and 50/50 = 1). In a trade with Saudi Arabia, if the United States is going to give up 100 bushels of corn in exports, it must import at least 50 barrels of oil to be just as well off. Clearly, to gain from trade it needs to be able to gain more than a half barrel of oil for its bushel of corn—or why trade at all?

Recall that David Ricardo argued that if each country specializes in its comparative advantage, it will benefit from trade, and total global output will increase. How can we show gains from trade as a result of comparative advantage and specialization? [link] shows the output assuming that each country specializes in its comparative advantage and produces no other good. This is 100% specialization. Specialization leads to an increase in total world production. (Compare the total world production in [link] to that in [link] .)

How specialization expands output
Country Quantity produced after 100% specialization — Oil (barrels) Quantity produced after 100% specialization — Corn (bushels)
Saudi Arabia 100   0
United States   0 100
Total World Production 100 100

What if we did not have complete specialization, as in [link] ? Would there still be gains from trade? Consider another example, such as when the United States and Saudi Arabia start at C and C', respectively, as shown in [link] . Consider what occurs when trade is allowed and the United States exports 20 bushels of corn to Saudi Arabia in exchange for 20 barrels of oil.

Production possibilities frontier in saudi arabia

On this graph, Corn is on the x-axis with a maximum production of 25 bushels and oil is on the y-axis with a maximum production of 100 barrels. Saudi Arabia begins producing and consuming at point C (coordinates 10, 60). If the “trade price” is 20 barrels of oil for 20 bushels of corn, the Saudis end up at D (coordinates 30, 40).
Gains from trade of oil can increase only by achieving less from trade of corn. The opposite is true as well: The more gains from trade of corn, the fewer gains from trade of oil.

Starting at point C, reduce Saudi Oil production by 20 and exchange it for 20 units of corn to reach point D (see [link] ). Notice that even without 100% specialization, if the “trading price,” in this case 20 barrels of oil for 20 bushels of corn, is greater than the country’s opportunity cost, the Saudis will gain from trade. Indeed both countries consume more of both goods after specialized production and trade occurs.

Visit this website for trade-related data visualizations.

Key concepts and summary

A country has an absolute advantage in those products in which it has a productivity edge over other countries; it takes fewer resources to produce a product. A country has a comparative advantage when a good can be produced at a lower cost in terms of other goods. Countries that specialize based on comparative advantage gain from trade.

Problems

France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.

  1. Draw a production possibilities frontier for each country. Hint : Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.
  2. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.
  3. Identify which country has the comparative advantage.
  4. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?
Got questions? Get instant answers now!

References

Krugman, Paul R. Pop Internationalism . The MIT Press, Cambridge. 1996.

Krugman, Paul R. “What Do Undergrads Need to Know about Trade?” American Economic Review 83, no. 2. 1993. 23-26.

Ricardo, David. On the Principles of Political Economy and Taxation . London: John Murray, 1817.

Ricardo, David. “On the Principles of Political Economy and Taxation.” Library of Economics and Liberty. http://www.econlib.org/library/Ricardo/ricP.html.

Questions & Answers

What is economics?
Bubu Reply
by this time
Emmanuel
It is a social science that analyses production,distribution and consumption of goods and services
Emmanuel
A social science that study human behavior in relationship with decision making
Jessica
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
mwangala Reply
What are the limitation and significant of macroeconomic
Usman Reply
explain the significance of concerpt of opportunity cost in planning
Mwanaid Reply
what is meant by the price elasticity of demand?
Martine Reply
when price of a commodity increase it's demand contracts , and whe the price of a commodity decreases it's demand expands so the degree of change in demand in response to change in own price of the commodity is called PED . Ed = percentage change in quantity demanded / percentage change in price
shaswat
What are the limitations of macroeconomic and their segnificant
Usman Reply
Discuss the role of competition in stimulating economic growth?
Daniel Reply
competition stimulate economic growth because in such types of economy,they is no monopoly power every supplier will want to produce to meet customers choice which brings about quality production and attract invested and customers into such economy
Koka
competition creates Monopoly because of economy of scale. it's not antithesis but different side of same coin
toko
competition result in high economic growth since every firm will intend to provide quality services and products to meet customers needs and requirements unlike in Monopoly situation where a firm just provide what it want to resulting in large stock piles of unwanted products ,ie inefficiency, howev
Mark
microeconomics study part of the economy but macroeconomic study the whole economy
Olokun Reply
studying the whole economy, solving the problem of the economy and building up the economy
Olokun
micro means small while macro means large
Olokun
standard of living is the footsteps of an economy because it plays important role for country to have crucial view about their budget ,import and export
Olokun
it will be differ because economic agent will only take their views on some part of household
Olokun
can opportunity cost be zero
OBED Reply
how many types of transportation do we have
Jacob
yes. when a customer's purchasing power is high, he may have d ability to purchase all he needs, dt makes opportunity cost zero
George
please can give more explanation on this question
OBED
what are the factors production
PETER Reply
Labour capital entrepreneurs
Leta
Land,capital, labour,and the entrepreneur
Tantoh
I will like to know use of calculus in economics
JHUMA Reply
do they use it in economics?
Pranav
I want to know if I should take calculus or statistics and probability my senior year of highschool
Yahir
yes for example in monopolistic competitive market..... TR=TC* & THIS CALCULATED BY CHANGING( DERIVATIVE LAW) MR =MC ** WILL BE THE FORMULA THAT USE.
Leta
please in which topic in economic is the question coming from.
Tantoh
from PCF in economics
Leta
why is unitary proportional to responsiveness
Etim Reply
any tip for igcse economics exam?pls
Stacey Reply
well
The
What is a market
Divine Reply
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
price of the related goods 2 price of the given commodity 3 income of the consumer 4 taste and preference 5 expectation in the future price
John
pls the taste and preference
Nas
explain briefly
Nas
a consumer taste and preference commodity changes for a time the man becomes
John
sorry sorry
John
is when the price of a commodity becomes high and can't afford example Samsung instead of iPhone
John
consumers who have high intense for goods will purchase the goods even if the price of that commodity increases because he or she preferred that commodity.people will be prefer iphone as its price increase
Yussif
as usual bad taste of preference is when a consumer regrets from one commodity to another in terms of the price
John
thanks alot
Nas
you're welcome
John
#Preference; #Income #Test
Dereje
#price Of Commodity #Income #Taste #Preference
Dereje
#Market is The Place Where Buyers And Sellers Are Exchanging Their Goods And service. #
Dereje
difference between macro and micro economics
Lawrence
Microeconomic Study about individual consumers market But Macroeconomis Study General economic Process Such As #Aggregate Demand #Aggregate Supples #GDp= #GNp
Dereje
nice so can u run down a brife discussion on GDP
Lawrence
good
Chinex
pls can someone differentiate between the perfectly elastic, perfectly inelastic and unitary
yhar Reply
and then again pls what are the types of elasticity, the methods of calculating it thank u
yhar
Perfectly inelastic is when the coefficient is equal to zero Unitary is when the coefficient is equal to one But am not sure if we have perfectly inelastic
John
I'm kind off confuse abt the PED, IED and co are they the types of elasticity we've
yhar
Yh the types are price elasticity cross and income elasticity of demand
John
do we've specific formulaes to calculate for each of them
yhar
yes. PED. changes in quantity demanded divided by changes in price
Vealmurugan
so pls what's the general name given to unitary, elastic n inelastic ? are the names given to the final result after doing the calculations?
yhar
P2-P1÷P1×100or Q2-Q1×Q1×100 PED
John
***tutor2u.net/economics/reference/price-elasticity-of-demand
Vealmurugan
They are elasticity coefficient
John
@John I don't get u well pls
yhar
whichone
John
P2-P1÷P1×100or Q2-Q1×Q1×100 PED @john pls tis is what m talking abt
yhar
Yh is the formula for PED
John
Pls are you having a for PED
John
thank u very
yhar
dy
Jobang
what is economics
Tayyeb
economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative use
John
is a science which study human behavior as a relationship between ends and scarce means which have alternative uses
Divine
yes this is because economic provide a body of knowledge on human economic principles under theories and these theories can be verified with real world data using science method in other words it was scientific method in arriving at solution identification of problem or basic data collection among
John
unitary ElasticWhen Elasticty =1 Perfectily Elastic When 0<1 inelastic when 0>
Dereje

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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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