The Concept of Comparative Advantage Suppose that in the U.s. 10 million roses can be produced with the same resources as 100,000 computers a Suppose also that in South America 10 million roses can be produced with the same resources as 30,000 computers a This example assumes that South american workers are less productive than U.S. workers Copyright C 2003 Pearson Education, Inc Slide 1-6
Copyright © 2003 Pearson Education, Inc. Slide 1-6 ▪ Suppose that in the U.S. 10 million roses can be produced with the same resources as 100,000 computers. ▪ Suppose also that in South America 10 million roses can be produced with the same resources as 30,000 computers. ▪ This example assumes that South American workers are less productive than U.S. workers. The Concept of Comparative Advantage
The Concept of Comparative Advantage If each country specializes in the production of the goods with lower opportunity costs, trade can be beneficial for both countries Roses have lower opportunity costs in South America Computers have lower opportunity costs in the U.S a The benefits from trade can be seen by considering the changes in production of roses and computers in both countries Copyright C 2003 Pearson Education, Inc Slide 1-7
Copyright © 2003 Pearson Education, Inc. Slide 1-7 ▪ If each country specializes in the production of the goods with lower opportunity costs, trade can be beneficial for both countries. • Roses have lower opportunity costs in South America. • Computers have lower opportunity costs in the U.S. ▪ The benefits from trade can be seen by considering the changes in production of roses and computers in both countries. The Concept of Comparative Advantage
The Concept of Comparative Advantage ble 2-1: Hypothetical Changes in Production Million roses Thousand Computers United States 10 +100 South america +10 30 Total 0 +70 Copyright C 2003 Pearson Education, Inc Slide 1-8
Copyright © 2003 Pearson Education, Inc. Slide 1-8 Table 2-1: Hypothetical Changes in Production The Concept of Comparative Advantage
The Concept of Comparative Advantage a The example in Table 2-1 illustrates the principle of comparative advantage If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade What determines comparative advantage? Answering this question would help us understand how country differences determine the pattern of trade (which goods a country exports) Copyright C 2003 Pearson Education, Inc Slide 1-9
Copyright © 2003 Pearson Education, Inc. Slide 1-9 ▪ The example in Table 2-1 illustrates the principle of comparative advantage: • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade. ▪ What determines comparative advantage? • Answering this question would help us understand how country differences determine the pattern of trade (which goods a country exports). The Concept of Comparative Advantage
A One-Factor Economy Assume that we are dealing with an economy(which we call Home. In this economy Labor is the only factor of production Only two goods(say wine and cheese)are produced The supply of labor is fixed in each country The productivity of labor in each goods is fixed Perfect competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 1-10
Copyright © 2003 Pearson Education, Inc. Slide 1-10 A One-Factor Economy ▪ Assume that we are dealing with an economy (which we call Home). In this economy: • Labor is the only factor of production. • Only two goods (say wine and cheese) are produced. • The supply of labor is fixed in each country. • The productivity of labor in each goods is fixed. • Perfect competition prevails in all markets