19.2 What Happens When a Country Has an Absolute Advantage in All Goods - Principles of Microeconomics - Hawaii Edition (2023)

Consider the example of trade between the United States and Mexico described inTabla 8. In this example, it takes four American workers to produce 1,000 pairs of shoes, but five Mexican workers to do so. It takes one American worker to produce 1,000 refrigerators, but it takes four Mexican workers to do it. The United States has an absolute productivity advantage in both shoes and refrigerators; That is, fewer workers are needed in the United States than in Mexico to produce a given number of shoes and a given number of refrigerators.

The absolute advantage compares this simplyproductivityof an employee in all countries. Answer the question: "How many inputs do I need to produce shoes in Mexico?" Comparative advantage asks the same question a little differently. Instead of comparing how many workers it takes to produce a good, ask, "How much do I have to give up to produce that good in this country?" Another way of looking at this is that comparative advantage identifies the good in which the producer's absolute advantage is relatively greater or the producer's absolute productivity disadvantage is relatively less. The United States can produce 1,000 shoes with four-fifths the number of workers in Mexico (four versus five), but it can produce 1,000 refrigerators with only one-fourth the number of workers (one versus four). Thus, the comparative advantage of the United States, where its absolute productivity advantage is relatively greater, is in refrigerators, and the comparative advantage of Mexico, where its absolute productivity disadvantage is less, is in the manufacture of footwear.

When nations increase production in their area of ​​comparative advantage and trade with each other, both countries can benefit. Again, the production possibilities frontier is a useful tool for visualizing this benefit.

Imagine a situation where the United States and Mexico have 40 workers each. for example likeTabla 9shows that if the United States divides its labor so that 40 workers make shoes, as it takes four workers in the United States to make 1,000 shoes, a total of 10,000 shoes will be produced. (If four workers can make 1,000 shoes, then 40 workers will make 10,000 shoes.) If 40 workers in the United States make refrigerators and each worker can produce 1,000 refrigerators, then a total of 40,000 refrigerators will be produced.

Production of refrigerators - with 40 workers

As always, the slope of each country's production possibilities frontier equals the opportunity cost of a refrigerator in terms of lost shoe output if labor shifts from the latter to the former production (seeillustration 1).

Suppose that, in the pre-trade situation, each nation prefers to produce the pair of shoes and refrigerators shown in point A.Tabla 10shows the production of each good for each country and the total production for the two countries.

Continuing with this scenario, each country transfers part of its labor force to its zone of comparative advantage. For example, the United States sends six shoe industry workers to produce refrigerators. As a result, US shoe production falls by 1,500 units (6/4 × 1,000), while refrigerator production increases by 6,000 (ie, 6/1 × 1,000). Mexico is also shifting production to its area of ​​comparative advantage, shifting 10 workers from refrigerators to shoe manufacturing. As a result, the production of refrigerators in Mexico falls by 2,500 (10/4 × 1,000), but the production of shoes increases by 2,000 pairs (10/5 × 1,000). Note that when both countries shift production toward their respective comparative advantages (even though they are relatively better), their combined production of both goods increases, as shown inTabla 11. The reduction in shoe production of 1,500 pairs in the United States is more than offset by the gain of 2,000 pairs of shoes in Mexico, while the reduction of 2,500 refrigerators in Mexico is more than offset by the additional 6,000 refrigerators produced in the United States .

This numerical example illustrates the remarkable finding of comparative advantage: even if one country has an absolute advantage in all goods and another country has an absolute disadvantage in all goods, both countries can still benefit from trade. Although the United States has an absolute advantage in the production of refrigerators and shoes, it makes economic sense to specialize in the good for which it has a comparative advantage. The United States will export refrigerators and import shoes in return.

This example shows that both parties can benefit from specializing in their comparative and commercial advantages. Using the opportunity cost in this example, it is possible to identify the range of possible deals that would benefit each country.

Before specialization and trade, Mexico began with the production of 4,000 pairs of shoes and 5,000 refrigerators (cf.illustration 1miTabla 10). So, in the given numerical example, Mexico shifted production to its comparative advantage and produced 6,000 pairs of shoes, but only 2,500 refrigerators. So if Mexico canExportno more than 2,000 pairs of shoes (if 2,000 pairs of shoes are sold) in exchangeimportedof at least 2,500 refrigerators (a profit of 2,500 refrigerators), he will be able to consume more of both goods than before the trade. Mexico will definitely be better. By contrast, before specialization and trade, the United States began producing 5,000 pairs of shoes and 20,000 refrigerators. In the example, you shifted production to your comparative advantage, producing only 3,500 shoes but 26,000 refrigerators. If the United States cannot export more than 6,000 refrigerators in exchange for importing at least 1,500 pairs of shoes, it will be able to consume more of both goods and obviously be better off.

The variety of professions that can benefit both nations is illustrated inTabla 12. For example, a trade in which the US exports 4,000 refrigerators to Mexico in exchange for 1,800 pairs of shoes would benefit both parties, in the sense that both countries could consume more of both goods than they would in a world without trade.

Trade allows each country to benefit from lower opportunity costs in the other country. If Mexico wants to produce more refrigerators without trade, it will have to face its internal opportunity cost and reduce the production of footwear. If, instead, Mexico produces more shoes and then sells refrigerators to the United States, whereopportunity costsproduction of refrigerators is lower, Mexico can really benefit from the lower opportunity cost of refrigerators in the United States. On the other hand, if the United States specializes in its comparative advantage of producing refrigerators and marketing Mexican shoes, international trade allows the United States to take advantage of the lower opportunity cost of producing shoes in Mexico.

The theory of comparative advantage explains why countries trade: they have different comparative advantages. It shows that the gains from international trade result from the search for comparative advantages and production with lower opportunity costs. The Work It Out function below shows how to calculate absolute and comparative advantage and how to apply it to a country's output.

To gain an intuitive understanding of how comparative advantage can benefit all parties, set aside for a moment examples involving national economies and consider the situation of a group of friends who decide to go camping together. The six friends have a wide range of skills and experiences, but one person in particular, Jethro, has been camping a lot and is also a great athlete. Jethro has an absolute advantage in all aspects of the camp: he is faster at backpacking, gathering firewood, rowing a canoe, setting up tents, cooking, and washing dishes. So here's the question: Since Jethro has an absolute productivity advantage in everything, should he be doing all the work?

Of course not! While Jethro is willing to work like a mule while everyone else sits, like most mortals he only has 24 hours a day. If everyone sits back and waits for Jethro to do everything, Jethro will not only be an unlucky camper, but there won't be much production for his group of six friends to consume. Comparative advantage theory suggests that everyone will benefit from discovering their areas of comparative advantage, that is, the area of ​​the camp where their productivity disadvantage compared to Jethro is the least. For example, Jethro can be 80% faster than anyone else at starting a fire and cooking, but only 20% faster at gathering firewood and 10% faster at setting up tents. In this case, Jethro should focus on lighting fires and cooking, letting others handle the other tasks depending on where his productivity handicap is least. When campers coordinate their efforts to gain a comparative advantage, everyone can benefit.

Even if a country has high levels of productivity across all goods, it can still benefit from trade. Trade gains result from comparative advantages. By specializing in a commodity that sacrifices less to produce, a country can produce more and offer that extra output for sale. If other countries also specialize and trade in their area of ​​comparative advantage, the high-productivity country can benefit from lower opportunity costs of production in other countries.

BernsteinWilliam J.A Glorious Exchange: How Trade Shaped the World. Atlantic Monatspresse. Nueva York. 2008.