ComparativeAdvantagein International TradeThis table shows what has to be given up to create each good: theopportunity cost.If the nations were in autarky, a situation in which they did not tradewith other countries,these would also bethe relative prices in eachcountry: a cell phone would trade for half the price of a tabletcomputerin Japan,and doublethe price of atablet computer inAmerica.JapanwouldliketotradeitscellphonesforAmericantablets,andvice versa.OpportunityCostsCell PhonesTabletComputersJapan0.5 tablet2 cellphonesUnited States2 tablet0.5 cellphoneTable 7.2The opportunity costsof producingcellphones andtablets2015PearsonEducation,Inc.1
© 2015 Pearson Education, Inc. 11 Comparative Advantage in International Trade This table shows what has to be given up to create each good: the opportunity cost. If the nations were in autarky, a situation in which they did not trade with other countries, these would also be the relative prices in each country: a cell phone would trade for half the price of a tablet computer in Japan, and double the price of a tablet computer in America. Japan would like to trade its cell phones for American tablets, and vice versa. The opportunity costs of producing cellphones and tablets Table 7.2 Opportunity Costs Cell Phones Tablet Computers Japan 0.5 tablet 2 cellphones United States 2 tablet 0.5 cellphone
HowCountries Gainfrom InternationalTrade7.3LEARNINGOBJECTIVEExplainhowcountriesgainfrominternationaltrade12@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 12 How Countries Gain from International Trade 7.3 Explain how countries gain from international trade
Production in AutarkySuppose that initially each country has 1000 hours available forproduction.In that time, Japan might produce 9000 cell phones and 1500tablet computer.In the same time, the U.S. might produce 1500 cell phones and1000 tablet computers.In total, 10500 cellphones and2500 tablet computers areproduced.ProductionandConsumptionTabletComputersCell Phones9,0001,500Japan1,5001,000United StatesProduction withoutTable 7.3trade@2015Pearson Education,Inc.13
© 2015 Pearson Education, Inc. 13 Production in Autarky Suppose that initially each country has 1000 hours available for production. In that time, Japan might produce 9000 cell phones and 1500 tablet computer. In the same time, the U.S. might produce 1500 cell phones and 1000 tablet computers. In total, 10500 cell phones and 2500 tablet computers are produced. Production without trade Table 7.3 Production and Consumption Cell Phones Tablet Computers Japan 9,000 1,500 United States 1,500 1,000
Production inAutarkyPreparingforTradeObserve what happens if each country specializes in itscomparative advantage:.Japancanproduce12000cellphonesThe U.S.canproduce4000 tablet computersIn total, 12000 cell phones and 4000 tablet computers areproduced.ProductionandConsumptionCellPhonesTabletComputers012,000Japan04,000UnitedStates14@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 14 Production in Autarky—Preparing for Trade Observe what happens if each country specializes in its comparative advantage: • Japan can produce 12000 cell phones. • The U.S. can produce 4000 tablet computers. In total, 12000 cell phones and 4000 tablet computers are produced. Production and Consumption Cell Phones Tablet Computers Japan 12,000 0 United States 0 4,000
Decidingon Termsof TradeThe terms of trade is the ratio at which a country can trade itsexports for imports from other countries.No country would accept terms of trade worse than its opportunitycostit would be better off producing by itself the goods that itwas importing.Terms of trade of one-for-one could be acceptable to both Japanand the United States.Withtheseterms,theymighttrade1500cellphonesfor1500computers, ending withthe consumption below:ProductionandConsumptionCellPhonesTabletComputers10,5001,500Japan1,5002,500UnitedStates15@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 15 Deciding on Terms of Trade The terms of trade is the ratio at which a country can trade its exports for imports from other countries. No country would accept terms of trade worse than its opportunity cost—it would be better off producing by itself the goods that it was importing. Terms of trade of one-for-one could be acceptable to both Japan and the United States. With these terms, they might trade 1500 cell phones for 1500 computers, ending with the consumption below: Production and Consumption Cell Phones Tablet Computers Japan 10,500 1,500 United States 1,500 2,500