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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

how do you translate this in Algebraic Expressions
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Need to simplify the expresin. 3/7 (x+y)-1/7 (x-1)=
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. After 3 months on a diet, Lisa had lost 12% of her original weight. She lost 21 pounds. What was Lisa's original weight?
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what's the easiest and fastest way to the synthesize AgNP?
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Cied
types of nano material
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I start with an easy one. carbon nanotubes woven into a long filament like a string
Porter
many many of nanotubes
Porter
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what is the function of carbon nanotubes?
Cesar
I'm interested in nanotube
Uday
what is nanomaterials​ and their applications of sensors.
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what is nano technology
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what is system testing?
AMJAD
preparation of nanomaterial
Victor Reply
Yes, Nanotechnology has a very fast field of applications and their is always something new to do with it...
Himanshu Reply
good afternoon madam
AMJAD
what is system testing
AMJAD
what is the application of nanotechnology?
Stotaw
In this morden time nanotechnology used in many field . 1-Electronics-manufacturad IC ,RAM,MRAM,solar panel etc 2-Helth and Medical-Nanomedicine,Drug Dilivery for cancer treatment etc 3- Atomobile -MEMS, Coating on car etc. and may other field for details you can check at Google
Azam
anybody can imagine what will be happen after 100 years from now in nano tech world
Prasenjit
after 100 year this will be not nanotechnology maybe this technology name will be change . maybe aftet 100 year . we work on electron lable practically about its properties and behaviour by the different instruments
Azam
name doesn't matter , whatever it will be change... I'm taking about effect on circumstances of the microscopic world
Prasenjit
how hard could it be to apply nanotechnology against viral infections such HIV or Ebola?
Damian
silver nanoparticles could handle the job?
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not now but maybe in future only AgNP maybe any other nanomaterials
Azam
Hello
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I'm interested in Nanotube
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this technology will not going on for the long time , so I'm thinking about femtotechnology 10^-15
Prasenjit
can nanotechnology change the direction of the face of the world
Prasenjit Reply
At high concentrations (>0.01 M), the relation between absorptivity coefficient and absorbance is no longer linear. This is due to the electrostatic interactions between the quantum dots in close proximity. If the concentration of the solution is high, another effect that is seen is the scattering of light from the large number of quantum dots. This assumption only works at low concentrations of the analyte. Presence of stray light.
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the Beer law works very well for dilute solutions but fails for very high concentrations. why?
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how did you get the value of 2000N.What calculations are needed to arrive at it
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Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?
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Source:  OpenStax, Openstax microeconomics in ten weeks. OpenStax CNX. Sep 03, 2014 Download for free at http://legacy.cnx.org/content/col11703/1.2
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