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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

Compare and contrast between Natural and Artificial Resources and their ultimate impacts in an economy. Give one example to support your discussion.
Angela Reply
Exemple: Diamant or uranium, fer, calcaire
Ramadan
how does interest rate affect aggregate output
kelvin Reply
what is Keynesian theory
kelvin
need a curves for typical isoquost and isoquant
kelvin
what is isoquant
kelvin
isoquat is a curve shows differnt combinations of two inputs which can produce same level of output
Majid
examples of giffen goods
Getrude
then what isoquost
Peter
, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.
Peter
that's an example
Peter
majid Khan that's the wrong definition of isoquant
The
you are defining isocost
The
isocost curve is a locus of points that shows the different combinations of commodities purchased by a consumer with a fixed budget
The
The change in fiscal policy leads to an increased level of output and interest rates is because an increase in government expenses directly affects aggregate demand. A decline in taxes result in more disposable income, consequently leading to a rise in consumption expenditure.
Peter
dats for kelvin
Peter
dats d answer for the audio how does interest rate affect aggregate output
Peter
question not audio
Peter
u are right joker
Peter
what is journal entry?
Abel
explain the nature of economics
Matilda Reply
interpret micro economic issues
Matilda
ito ang dami ng producto na nais handa at kanyang ibenta ng isang prodyuser
Jomar Reply
i dont understand
Gaabshe
even I also don't understand ..this language.. vn I converse everybody say farzana ur language is not understood by all user? now no one there is question about it?
shaikh
he is saying that "this is the amount of product it wants to be ready and sells by a producer"
Aman
I Merr has knowledge,which is the economiccircuit role in a society
Ramadan
What is diminishing returns?
Shadrach Reply
explain competitive demand
ADENIJI Reply
the demand that are compiting for sale. the buyer can substitute one for another good
Iftikhar
yg
Margarette
the demand where commodities fight for the market. in this type of demand, commodities can be substituted for the most suitable one subject to ( price, consumers choice, consumers income etc)
WILSON
Demand is said to be competitive when a commodity that is needed to satisfy wants in place of another similar goods. increase in price of a commodity X will result in increase in demand of the substitute (commmodity Y).
yusuf
examples of giffen goods are garri (cassava), maize
yusuf Reply
what is Public Finance?
kweku Reply
it's basically the field of economics that deals with the government's involvement in the economy; from spending to maybe interest rate manipulation, etc.
Matthew
examples of giffen goods
Getrude
i want to get the solutions of problems how i get kindly give guidance
Syeda Reply
please give some suggestions about getting solutions of all chapters...
Syeda
hard work
Iftikhar
and the grace of God
The
knowledge skills
MUSA
Syeda Economics is difficult. No all fields are difficult
The
what is Keynesian
AKINOLA
Keynesian economics is the theory proposed by Keynes( an economist). He proposed to manipulate demand side factors to bring economy out of depression in 1930s.
Champro
whose totaly oppossid the government intervention and give importance to agreegad demand
Iftikhar
Good afternoon my fellow forum brothers and sisters
Abdullahi Reply
no just want to know true God
Suprim
Good afternoon!!
Martha
hey is there somebody single n young like me bcoz I'm looking for
Suprim
what is facing trade offs
Nancy Reply
It is giving up a commodity to purchase another commodity
The
for example, when we have two commodities like chicken and turkey you can trade off of give up chicken to purchase turkey
The
that can also be called foregone goods
AKINOLA
it like opportunity cost
AKINOLA
it's like trade by batter
Abdullahi
Do you transform into thesecourses, in french people?
Ramadan
I can just speak french andI can just speak french and no english
Ramadan
what is elastic
Tida Reply
elastic is the change in to price and change in demand
ehtesham
Is the percentage change in quantity demand and quantity supply.
Robert
Or percentage change in price of demand and supply
Robert
Right
ehtesham
Robert Mensah you are explaining elasticity of demand
The
robert i think he talk about elastic releated to elasticity of price a proportionate change in price over qd
Iftikhar
can anyone explain what happrn her i don't understand anything
Brahim
is the percentage change in demand as price change
MUSA
sometimes price is elastic,inelastic
The
price elasticity is different from price being elastic
The
elasticity is not always the percentage change in demand as a result of changes in price. there's income elasticity and cross elasticity so it's not necessarily always price
The
elastic is when a change in price of a commodity results in a relatively a larger proportion change in the quantity demand of the commodity
Nancy
what is inelastic
Tida Reply
price is said to be inelastic when it is less than 1
The
what is national income accounting
Aisha Reply
National income is the income earned by all factors of production..
Majid
So this benefits the workers or the businesses?
Neil
Like whose income are we talking about here
Neil
what is multiplier
Khalid
Good & services manufactured in a country with in one year is calld national income
Fani
incom earned by using of sources of production is national income while i dont know the accounting insuch
Iftikhar
neil and aisha can u explain the turm accounting in such question
Iftikhar
I think when we include accounting national income accounting is the measurement of total goods and services produced in an economy in a given period of time
The
what is mutual funds
Khalid Reply
it is a combination of financial securities such as treasury bills , bonds etc in one managed by an institution that individuals and firms invest in for profit. it is usually a long term investment and is seen as a low risk investment because the financial instruments invested in, are diversified.
Ekeanyanwu
A mutual fund is a professional managed investment that pools money from many investors to invest.
Malik

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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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