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Shifting production toward comparative advantage raises total output
Country Shoe Production Refrigerator Production
United States 3,500 26,000
Mexico 6,000 2,500
Total 9,500 28,500

This numerical example illustrates the remarkable insight of comparative advantage: even when one country has an absolute advantage in all goods and another country has an absolute disadvantage in all goods, both countries can still benefit from trade. Even though the United States has an absolute advantage in producing both refrigerators and shoes, it makes economic sense for it to specialize in the good for which it has a comparative advantage. The United States will export refrigerators and in return import shoes.

How opportunity cost sets the boundaries of trade

This example shows that both parties can benefit from specializing in their comparative advantages and trading. By using the opportunity costs in this example, it is possible to identify the range of possible trades that would benefit each country.

Mexico started out, before specialization and trade, producing 4,000 pairs of shoes and 5,000 refrigerators (see [link] and [link] ). Then, in the numerical example given, Mexico shifted production toward its comparative advantage and produced 6,000 pairs of shoes but only 2,500 refrigerators. Thus, if Mexico can export no more than 2,000 pairs of shoes (giving up 2,000 pairs of shoes) in exchange for imports    of at least 2,500 refrigerators (a gain of 2,500 refrigerators), it will be able to consume more of both goods than before trade. Mexico will be unambiguously better off. Conversely, the United States started off, before specialization and trade, producing 5,000 pairs of shoes and 20,000 refrigerators. In the example, it then shifted production toward its comparative advantage, producing only 3,500 shoes but 26,000 refrigerators. If the United States can export no more than 6,000 refrigerators in exchange for imports of at least 1,500 pairs of shoes, it will be able to consume more of both goods and will be unambiguously better off.

The range of trades that can benefit both nations is shown in [link] . For example, a trade where the U.S. exports 4,000 refrigerators to Mexico in exchange for 1,800 pairs of shoes would benefit both sides, in the sense that both countries would be able to consume more of both goods than in a world without trade.

The range of trades that benefit both the united states and mexico
The U.S. economy, after specialization, will benefit if it: The Mexican economy, after specialization, will benefit if it:
Exports fewer than 6,000 refrigerators Imports at least 2,500 refrigerators
Imports at least 1,500 pairs of shoes Exports no more than 2,000 pairs of shoes

Trade allows each country to take advantage of lower opportunity costs in the other country. If Mexico wants to produce more refrigerators without trade, it must face its domestic opportunity costs and reduce shoe production. If Mexico, instead, produces more shoes and then trades for refrigerators made in the United States, where the opportunity cost    of producing refrigerators is lower, Mexico can in effect take advantage of the lower opportunity cost of refrigerators in the United States. Conversely, when the United States specializes in its comparative advantage of refrigerator production and trades for shoes produced in Mexico, international trade allows the United States to take advantage of the lower opportunity cost of shoe production in Mexico.

Questions & Answers

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
what is macro economics
ROGATH Reply
In the short-run, the monopoly makes?
Felix Reply
A demand which gives rise to the reverse of the law of demand is?
Felix
Price  (₦)Quantity Demanded 8  610  12 If we move from 8 to 6, the elasticity of demand is
Felix
inelastic demand
ROGATH
there is change in price but no change in demand. if price increase 10% but demand remain constant
Taur
does inventories accumulation included in GDP?
kelly Reply
Selling goods and services below or above the equilibrium price.
Daniel Reply
I will be there at the same time .....
SHADAB
Yes
HASSAN
Economics it big in the capital in
HASSAN
what is the meaning of black market
David Reply
the law of demand to price of goods if price is $13 and quantity $60, price $20 and y variable how calculate
Jackie Reply
what is diminishing marginal utility
Harish Reply
what is indifference curve
Harish
when the rate of utility goes on diminishing with every success ful unit is know as diminishing marginal utlity
Sana
what's economic growth
Rukundo Reply
what is economic growth
Rukundo
what is growth
Amina
growth is a sort form of development growth means development of only one specil part
RAJESH
one special part
HASSAN
what is wants
Daudu Reply
want is a specil desire whereas have you available resources for satisfying desire of products
RAJESH
what is scarcity
Syanda Reply
scarcity means wants
Daudu
scarcity is the situation whereby there are limited means in a world of unlimited ends.
suleysh
ok
Daudu
what is end?
Daudu
what is microeconomics
Isaac Reply
it study of only individual units like-a consumer,a firm,an industry and income of an individual.......
SHADAB
what is Economics Bacis
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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