Page 120 - Economics

CONFIRMING PAGES

CHAPTER 5
91
The United States in the Global Economy
circumstances. Specialization and trade are mutually TABLE 5.6 Comparative-Advantage Example: A Summary
“profitable” to the two nations if the comparative costs of
producing the two products within the two nations differ. Soybeans Avocados 1 _
What are the comparative costs of avocados and soybeans Mexico: Must give up Mexico: Must give up ton
4
4 tons of avocados to
of soybeans to get 1 ton
in Mexico? By comparing production alternatives A and B get 1 ton of soybeans of avocados
in Table 5.4 , we see that 5 tons of soybeans ( 15 10)
must be sacrificed to produce 20 tons of avocados United States: Must give United States: Must give up
1 _
ton of soybeans to get 1 ton
up 3 tons of avocados
3
( 20 0). Or, more simply, in Mexico it costs 1 ton to get 1 ton of soybeans of avocados
of soybeans (S) to produce 4 tons of avocados (A); that is, Comparative advantage: Comparative advantage:
1S 4A. (The “ ” sign simply signifies “equivalent to.”) United States Mexico
Because we assumed constant costs, this domestic oppor-
tunity cost will not change as Mexico expands the output
of either product. This is evident from production possi- only if it could obtain more than 3 tons of avocados for 1 ton
bilities B and C, where we see that 4 more tons of avoca- of soybeans by trading with Mexico. Similarly, Mexico can
dos ( 24 20) cost 1 unit of soybeans ( 10 9). shift production at the rate of 4A for 1S. So it would be
Similarly, in Table 5.5 , comparing U.S. production al- advantageous to Mexico to specialize in avocados if it could
ternatives R and S reveals that in the United States it costs get 1 ton of soybeans for less than 4 tons of avocados.
10 tons of soybeans ( 30 20) to obtain 30 tons of avo- Suppose that through negotiation the two nations
1 _
cados ( 30 0). That is, the domestic comparative-cost agree on an exchange rate of 1 ton of soybeans for 3 tons
2
ratio for the two products in the United States is 1S 3A. of avocados. These terms of trade are mutually beneficial
Comparing production alternatives S and T reinforces to both countries, since each can “do better” through such
this conclusion: an extra 3 tons of avocados ( 33 30) trade than through domestic production alone. The
1 _
comes at the sacrifice of 1 ton of soybeans ( 20 19). United States can get 3 tons of avocados by sending 1 ton
2
The comparative costs of the two products within the of soybeans to Mexico, while it can get only 3 tons of avo-
two nations are obviously different. Economists say that cados by shifting its own resources domestically from soy-
the United States has a domestic comparative advantage beans to avocados. Mexico can obtain 1 ton of soybeans at
1 _
or, simply, a comparative advantage over Mexico in soy- a lower cost of 3 tons of avocados through trade with the
2
beans. The United States must forgo only 3 tons of avoca- United States, compared to the cost of 4 tons if Mexico
dos to get 1 ton of soybeans, but Mexico must forgo 4 tons produced the ton of soybeans itself.
of avocados to get 1 ton of soybeans. In terms of domestic
opportunity costs, soybeans are relatively cheaper in the Gains from Specialization and Trade Let’s
United States. A nation has a comparative advantage in pinpoint the gains in total output from specialization and
some product when it can produce that product at a lower trade. Suppose that, before specialization and trade, pro-
domestic opportunity cost than can a potential trading duction alternative C in Table 5.4 and alternative T in 5.5
partner. Mexico, in contrast, has a comparative advantage were the optimal product mixes for the two countries.
1 _
in avocados. While 1 ton of avocados costs ton of soy- That is, Mexico preferred 24 tons of avocados and 9 tons
3
1 _
beans in the United States, it costs only ton of soybeans of soybeans ( Table 5.4 ) and the United States preferred 33
4
in Mexico. Comparatively speaking, avocados are cheaper tons of avocados and 19 tons of soybeans ( Table 5.5 ) to all
in Mexico. We summarize the situation in other available domestic alternatives. These outputs are
Table 5.6 . Be sure to give it a close look. shown in column 1 in Table 5.7 .
Because of these differences in domes- Now assume that both nations specialize according to
tic opportunity costs, if both nations spe- their comparative advantage, with Mexico producing 60
cialize, each according to its comparative tons of avocados and no soybeans (alternative E) and the
advantage, each can achieve a larger total United States producing no avocados and 30 tons of soy-
O 5.1
output with the same total input of re- beans (alternative R). These outputs are shown in column
Absolute and 1 _
comparative sources. Together they will be using their 2 in Table 5.7 . Using our 1S 3 A terms of trade, assume
2
advantage scarce resources more efficiently. that Mexico exchanges 35 tons of avocados for 10 tons of
U.S. soybeans. Column 3 in Table 5.7 shows the quantities
Terms of Trade The United States can shift produc- exchanged in this trade, with a minus sign indicating ex-
tion between soybeans and avocados at the rate of 1S for ports and a plus sign indicating imports. As shown in col-
3A. Thus, the United States would specialize in soybeans umn 4, after the trade Mexico has 25 tons of avocados and

mcc26632_ch05_084_103.indd 91 8/21/06 4:25:51 PM
8/21/06 4:25:51 PM
mcc26632_ch05_084_103.indd 91