To gain from trade, nations do not need an absolute advantage relative to other nations but a comparative advantage. 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). 82. As always, the slope of the production possibility frontier for each country is the opportunity cost of one refrigerator in terms of foregone shoe production–when labor is transferred from producing the latter to producing the former (see Figure 1). d. Mexico will not have a comparative advantage … In this example, is absolute advantage the same as comparative advantage, or not? Because 1/2 lumber < 2 lumber, Venezuela has the comparative advantage in producing oil. If both of them focus on producing the goods with lower opportunity costs, their combined output will increase and all of them will be better off. This revision video takes students through a worked example of comparative advantage and the potential gains from specialisation and trade at a mutually beneficial terms of trade between two countries. The range of trades that can benefit both nations is shown in Table 5. (a) With 40 workers, the United States can produce either 10,000 shoes and zero refrigerators or 40,000 refrigerators and zero shoes. 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. If Mexico wants to produce more refrigerators without trade, it must face its domestic opportunity costs and reduce shoe production. Increased saving and investment resulting in economic growth c. Increased competition resulting in lower prices and wider range of output d. Increasing comparative advantage leading to specialization ANS: D PTS: 1 DIF: Moderate NAT: BPROG: … For additional practice and review using numbers, watch this video from ACDC economics. The idea that nations benefit from trade has nothing to do with whether a country has an absolute advantage in producing a particular good. Step 5. Countries are better off if they specialize in producing the goods for which they have a comparative advantage. 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. B. With the same labor time, Canada can produce either 20 barrels of oil or 40 tons of lumber. "JK�i�)�)���Qӊ;�ԓ|�Ln�,��,?2N���Iw`��l�^e�O��s�0�ȥ���r�O.�-�}����lFsS��R�M�+�L�{�%�6��`�[C�0ߣp��Go��z��_�o������N���:� ��$S�js��v_O�V�*�a��F��I�������*�\郢���S�q�?ž$�����Zw@. Figure 1. stream Which of these economists considered comparative advantage in production to be the basis for trade between nations? <> Mexico also moves production toward its area of comparative advantage, transferring 10 workers away from refrigerators and toward production of shoes. Economies of large-scale production resulting in decreasing unit cost b. The mercantilists contended that because one nation’s gains from trade come the expense of its trading partners, not all nations could simultaneously realize gains from trade. In our example above, for country A, every extra unit of good Y produced involves an … It is 9/10ths as efficient at producing good X but it is only 3/5ths as efficient at producing good Y. b. Mexico can benefit from trade but the United States cannot. These goods are homogeneous, meaning that consumers and producers cannot differentiate between shoes from Mexico and shoes from the U.S.; nor can they differentiate between Mexican or American refrigerators. Which country has a comparative advantage in the production of oil? The opportunity cost of one lumber is 1/2 oil. Absolute advantage is the ability of a country to produce more of a good than other countries using the same amount of resources. They can then trade … One lumber has an opportunity cost of two oil. comparative advantage is the key to determining specialization and trade. What Happens When a Country Has an Absolute Advantage in All Goods. When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. If labor in Mexico is less productive than labor in the United States in all areas of production, a. neither nation can benefit from trade. One worker in Venezuela can produce 60 barrels of oil compared to a worker in Canada who can produce only 20. Countries have a comparative advantage in production when they can produce a good or service at a lower opportunity cost than other producers. To calculate absolute advantage, look at the larger of the numbers for each product. But Country A has a comparative advantage in the production of good X. Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn. 5 0 obj Price difference If the price for the same thing is different in 2 countries, it provides and incentive for trade to occur. The dynamic gains from trade include all of the following except: a. In suppliers, and demanding local customers. Answer: Even if a country does not have any goods with an absolute productivity advantage, it can benefit from trade. The United States has an absolute advantage in producing 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. Production Possibilities and Comparative Advantage, Mutually Beneficial Trade with Comparative Advantage, How Opportunity Cost Sets the Boundaries of Trade, https://cnx.org/contents/vEmOH-_p@4.44:1p6taX-z@3/What-Happens-When-a-Country-Ha, https://www.youtube.com/watch?time_continue=408&v=4rUfoU04QJM, Calculate absolute and comparative advantage. Comparative Advantage in Production: Nations like individuals maximise their potential well-being and consumption by producing goods and services that they are especially well- suited to produce. Types of goods and services and selling these on the international market as inputs were from! The dynamic gains from trade gains from trade are greatest when there are no between! Has nothing to do so were transferred from producing one barrel of oil or lumber this scenario each. 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