![]() For example, the United States transfers six workers away from shoes and toward producing refrigerators. CountryĬontinuing with this scenario, suppose that each country transfers some amount of labor toward its area of comparative advantage. Table shows the output of each good for each country and the total output for the two countries. Letâs say that, in the situation before trade, each nation prefers to produce a combination of shoes and refrigerators that is shown at point A. Point B is where they end up after trade. Point A on both graphs is where the countries start producing and consuming before trade. All other points on the production possibility line are possible combinations of the two goods that can be produced given current resources. (b) With 40 workers, Mexico can produce a maximum of 8,000 shoes and zero refrigerators, or 10,000 refrigerators and zero shoes. ![]() Production Possibility Frontiers (a) With 40 workers, the United States can produce either 10,000 shoes and zero refrigerators or 40,000 refrigerators and zero shoes. Production Possibilities before Trade with Complete SpecializationĪs always, the slope of the production possibility frontier for each country is the opportunity cost of one refrigerator in terms of foregone shoe productionâwhen labor is transferred from producing the latter to producing the former (see Figure). Refrigerator Production â using 40 workers If the 40 workers in the United States are making refrigerators, and each worker can produce 1,000 refrigerators, then a total of 40,000 refrigerators will be produced. (If four workers can make 1,000 shoes, then 40 workers will make 10,000 shoes). For example, as Table shows, if the United States divides its labor so that 40 workers are making shoes, then, since it takes four workers in the United States to make 1,000 shoes, a total of 10,000 shoes will be produced. Again, the production possibility frontier is a useful tool to visualize this benefit.Ĭonsider a situation where the United States and Mexico each have 40 workers. When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. Mutually Beneficial Trade with Comparative Advantage So, the comparative advantage of the United States, where its absolute productivity advantage is relatively greatest, lies with refrigerators, and Mexicoâs comparative advantage, where its absolute productivity disadvantage is least, is in the production of shoes. 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). Instead of comparing how many workers it takes to produce a good, it asks, âHow much am I giving up to produce this good in this country?â Another way of looking at this is that comparative advantage identifies the good for which the producerâs absolute advantage is relatively larger, or where the producerâs absolute productivity disadvantage is relatively smaller. It answers the question, âHow many inputs do I need to produce shoes in Mexico?â Comparative advantage asks this same question slightly differently. Resources Needed to Produce Shoes and RefrigeratorsĪbsolute advantage simply compares the productivity of a worker between countries. Number of Workers needed to produce 1,000 units â Refrigerators Number of Workers needed to produce 1,000 units â Shoes 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. worker to produce 1,000 refrigerators, but it takes four Mexican workers to do so. workers to produce 1,000 pairs of shoes, but it takes five Mexican workers to do so. What Happens When a Country Has an Absolute Advantage in All Goods OverviewĬonsider the example of trade between the United States and Mexico described in Table. The Benefits of Reducing Barriers to International Trade.Intra-industry Trade between Similar Economies.What Happens When a Country Has an Absolute Advantage in All Goods.What Happens When a Country Has an Absolute Advantage in All Goods The Use of Mathematics in Principles of Economics.Exchange Rates and International Capital Flows.The Aggregate Demand/Aggregate Supply Model.The International Trade and Capital Flows.
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