Why Nations Trade: Why Nations Trade Chapter 18 Discussion Topics: Discussion Topics Why trade?
Gains from trade Concepts Affecting Trade: Concepts Affecting Trade Absolute advantage – exists when one nation can produce goods more cheaply than another nation.
Comparative advantage – ability of a nation to specialize in the production of the good for which it has the greatest comparative advantage or lowest opportunity cost.
Competitive advantage – economic competitive of a nation reflected in the absolute cost of a given good in a given market at a particular point in time. Pages 431-437 Example of Absolute AdvantageUnits of Ouput/Unit of Labor: Example of Absolute Advantage Units of Ouput/Unit of Labor The U.S. is the most efficient producer of wheat while Mexico is the
most efficient producer of coffee. With trade, the U.S. would specialize
in wheat and exchange part of its surplus for coffee. Mexico would
specialize in coffee and trade part of the surplus for wheat Page 433 Example of Comparative AdvantageUnits of Ouput/Unit of Labor: Example of Comparative Advantage Units of Ouput/Unit of Labor Mexico has the absolute disadvantage in producing both goods because
its productivity fell by 50% from the previous example). While the U.S.
is more productive in both goods, its relative advantage is greatest in
wheat (5.0>1.33). The U.S. therefore has a comparative advantage in
wheat while Mexico has the least comparative disadvantage in coffee, or
comparative advantage in coffee. Page 435 Factors Affecting Comparative Advantage….: Factors Affecting Comparative Advantage…. National differences in opportunity costs
Costs affected by availability of resources
Costs affected by production requirements for goods and services produced
Costs affected by resource combinations
Costs affected by resource mobility Page 436 Production Possibilities Schedule: Production Possibilities Schedule Page 438 Based upon assumption that both
countries fully employ all resources,
technology and specific amounts of
labor per year. Slide8: Page 439 U.S produces 100
tons of wheat and
40 tons of coffee. Slide9: Page 439 U.S produces 100
tons of wheat and
40 tons of coffee. Mexico produces 32
tons of wheat and 12
tons of coffee Slide10: Page 440 Through trade, the U.S.
specializes in wheat at
point B, trades 50 tons of
wheat to Mexico for 45 tons
of coffee, and consumes
more of both goods at
point C (45 tons of coffee
and 150 tons of wheat).
By comparing point C with
point A, we see that the
U.S. has gained from trade. Slide11: Page 440 Mexico will specialize in
coffee, producing 60 tons
at point B’ and no wheat.
They would trade 45 tons
of coffee for 50 tons of
wheat, and consumer more
of both goods (50 tons of
wheat and 15 tons of
coffee at point C’) than it
could at point A’. Summary: Summary The law of comparative advantage was contrasted with absolute advantage and competitive advantage.
Trade occurs because traders anticipate gains from trading.
Comparative advantage determines why nations trade.
The basis for trade is differing opportunity costs among nations.
Nations specialize in producing those goods in which they are most efficient and exchange these goods with other nations. Chapter 19 discusses trade policy and preferential trading agreements….: Chapter 19 discusses trade policy and preferential trading agreements….