Page 121 - Economics

CONFIRMING PAGES

PART ONE
92
Introduction to Economics and the Economy
TABLE 5.7 Specialization According to Comparative Advantage and the Gains from Trade (in Tons)
(5)
(1) (2) (4) Gains from
Outputs before Outputs after (3) Outputs Available Specialization and
Country Specialization Specialization Amounts Traded after Trade Trade (4) (1)
Mexico 24 avocados 60 avocados 35 avocados 25 avocados 1 avocados
9 soybeans 0 soybeans 10 soybeans 10 soybeans 1 soybeans
United States 33 avocados 0 avocados 35 avocados 35 avocados 2 avocados
19 soybeans 30 soybeans −10 soybeans 20 soybeans 1 soybeans

10 tons of soybeans, while the United States has 35 tons of dollars does it take to buy a truckload of Mexican avocados
avocados and 20 tons of soybeans. Compared with their selling for 3000 pesos, a German automobile selling for
optimum product mixes before specialization and trade 50,000 euros, or a Japanese motorcycle priced at 300,000
(column 1), both nations now enjoy more avocados and yen? Producers in Mexico, Germany, and Japan want pay-
more soybeans! Specifically, Mexico has gained 1 ton of ment in pesos, euros, and yen, respectively, so that they
avocados and 1 ton of soybeans. The United States has can pay their wages, rent, interest, dividends, and taxes.
gained 2 tons of avocados and 1 ton of soybeans. These A foreign exchange market , a market in which
gains are shown in column 5. various national currencies are exchanged for one
Specialization based on comparative advantage improves another, serves this need. The equilibrium prices in such
global resource allocation. The same total inputs of world currency markets are called exchange rates. An exchange
resources and technology result in a larger global output. If rate is the rate at which the currency of one nation can
Mexico and the United States allocate all their resources to be exchanged for the currency of another nation. (See
avocados and soybeans, respectively, the same total inputs of Global Perspective 5.2.)
resources can produce more output between them, indicat- The market price or exchange rate of a nation’s cur-
ing that resources are being allocated more efficiently. rency is an unusual price; it links all domestic prices with
Through specialization and international trade a na- all foreign prices. Exchange rates enable consumers in one
tion can overcome the production constraints imposed by
its domestic production possibilities table
and curve. Our discussion of Tables 5.4 ,
5.5 , and 5.7 has shown just how this is GLOBAL PERSPECTIVE 5.2
done. The domestic production possibili-
ties data ( Tables 5.4 and 5.5 ) of the two Exchange Rates: Foreign Currency per U.S. Dollar
countries have not changed, meaning that The amount of foreign currency that a dollar will buy varies
W 5.1
neither nation’s production possibilities greatly from nation to nation and fluctuates in response to
Gains from supply and demand changes in the foreign exchange market.
specialization curve has shifted. But specialization and The amounts shown here are for March 2006.
trade mean that citizens of both countries
can enjoy increased consumption (column 5 of Table 5.7 ).
(Key Question 4) $1 Will Buy
44.3 Indian rupees
The Foreign Exchange Market .57 British pounds
1.16 Canadian dollars
Buyers and sellers, whether individuals, firms, or nations,
use money to buy products or to pay for the use of re- 10.7 Mexican pesos
sources. Within the domestic economy, prices are stated 1.31 Swiss francs
in terms of the domestic currency and buyers use that cur- .83 European euros
rency to purchase domestic products. In Mexico, for ex-
117 Japanese yen
ample, buyers have pesos, and that is what sellers want.
International markets are different. Sellers set their 975 South Korean won
prices in terms of their domestic currencies, but buyers 7.8 Swedish kronors
often possess entirely different currencies. How many

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