chapter 7: comparative advantage and the gains from...

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‹#›Macroeconomics6th edition

Chapter 7Comparative Advantage and theGains from International Trade

Modified by Yulin HouFor Principle of MacroeconomicsFlorida International UniversitySummer 2017

Copyright © 2017 Pearson Education, Inc. All Rights Reserved


‹#›‹#›Comparative Advantage in InternationalTrade

Comparative advantage is the ability of an individual, a firm, or acountry to produce a good or service at a lower opportunity costthan competitors. Comparative advantage arises from having alower opportunity cost than your competitor.

Opportunity cost: The highest-valued alternative that must begiven up to engage in an activity.


‹#›Table 7.1 An Example of Japanese Workers Being MoreProductive Than American Workers

42United States

612Japan

TabletsSmartwatchesBlank

Output per Hour of WorkBlank

Japan has an absolute advantage in producing bothsmartwatches and tables.

Absolute advantage: The ability to produce more of a good orservice than competitors when using the same amount ofresources.


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Table 7.2 The Opportunity Cost of Producing Smartwatchesand Tablets

0.5 smartwatch2 tabletsUnited States

2 smartwatches0.5 tabletJapan


Opportunity CostsBlank

If the nations were in autarky, a situation in which a country doesnot trade with other countries


‹#›‹#›How Countries Gain from InternationalTrade

If countries did not trade, they would consume what theyproduced.

But if countries have different opportunity costs, they might eachbe willing to trade some of what they have a comparativeadvantage at producing for what the other country is (relatively)good at producing. Both countries might be made better off bysuch a trade.


‹#›Table 7.3 Production without Trade

1,0001,500United States

1,5009,000Japan


Production and ConsumptionBlank

Suppose that initially each country has 1000 hours to spend.• In that time, Japan might produce 9,000 smartwatches and

1,500 tablet computers.• In the same time, the U.S. might produce 1,500 smartwatches

and 1,000 tablet computers.

In total, 10,500 smartwatches and 2,500 tablet computers areproduced.


‹#›Production in Autarky—Preparing forTrade

4,0000United States

012,000Japan

Tablet ComputersSmartwatchesProduction and Consumption

Observe what happens if each country specializes in itscomparative advantage:• Japan can produce 12,000 smartwatches.• The U.S. can produce 4,000 tablet computers.

In total, 12,000 smartwatches and 4,000 tablet computers areproduced. Observe that more of both goods are produced.


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‹#›Why Don’t We See CompleteSpecialization?In the real world, products are not generally produced by only onenation. Reasons include:

• Not all goods and services can be traded internationally(medical services, for example).

• Production of many goods involves increasing opportunity costs(so small amounts of production are likely to take place inseveral countries).

• Tastes for products differ (cars, for example); countries mighthave comparative advantages in different sub-types ofproducts.


‹#›Does anyone lose as a result ofinternational trade?

Expanding trade eliminates the jobs of workers employedat company that are less efficient than foreign companies.


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If the government imposesa $0.50 per gallon tariff, theU.S. price rises to $1.50.

U.S. production rises, andU.S. consumption falls.

Area T is the tariff revenue

Tariffs


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Discuss the effect of a tariff

If there is a tariff on sugar, discuss the effect on

sugar supplierssugar consumerscandy/chocolate supplierscandy/chocolate consumers


‹#›‹#›The Arguments over Trade Policies andGlobalization

Globalization: The process of countries becoming moreopen to foreign trade and investment

discuss the benefits and costs of globalization

chapter 7: comparative advantage and the gains from...

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