Dolan, Microeconomics 4e, Ch. 15 Survey of Economics Edwin G. Dolan and Kevin C. Klein Best Value Textbooks 4 th edition Chapter 15 Global Trade and Trade Policy

Dolan and Klein, Survey of Economics 4e, Ch. 15 US Exports of Goods and Services The United States is a leading exporter and importer of both goods and services.

Dolan and Klein, Survey of Economics 4e, Ch. 15 Opportunity Cost with Constant Costs Assume that labor inputs per unit of output are constant for two goods and two countries.  Labor inputs in Spain:  4 hours per ton of fish  2 hours per ton of grain  Labor inputs in Norway:  5 hours per ton of fish  5 hours per ton of grain  Opportunity cost means the cost of something measured in terms of the opportunities that must be sacrificed in order to get it.  In Spain, opportunity cost of 1 ton of fish is 2 tons of grain.  In Norway, opportunity cost of 1 ton of fish is 1 ton of grain.

Dolan and Klein, Survey of Economics 4e, Ch. 15 Absolute and Comparative Advantage Labor inputs in Spain:  4 hours per ton of fish  2 hours per ton of grain Labor inputs in Norway  5 hours per ton of fish  5 hours per ton of grain Spain is said to have an absolute advantage in producing both goods because production uses absolutely fewer resources. A country is said to have a comparative advantage in producing a good if it has a lower opportunity cost than its trading partners.  Spain has a comparative advantage in production of grain.  Norway has a comparative advantage in production of fish.

Dolan and Klein, Survey of Economics 4e, Ch. 15 Numerical Example of Gains from Trade When opportunity costs of goods differ, both countries can gain from trade if each exports the good in which it has a comparative advantage.

Dolan and Klein, Survey of Economics 4e, Ch. 15 Graphical Example of Comparative Advantage  Before trade, Spain produces and consumes at point A and Norway at point A’. World consumption is at point P, inside the world production possibility frontier.  After trade, Spain specializes in grain (point B) and trades part of the grain for fish, moving to consumption point C. Norway specializes in fish (point B’) and reaches consumption point B’ through trade.  World efficiency is improved, and point Q on the world production possibility frontier is reached.

Dolan and Klein, Survey of Economics 4e, Ch. 15 Generalizations  A country is said to have a comparative advantage in producing a good if it has a lower opportunity cost than trading partners.  To gain from trade, a country should  Export goods in which it has a comparative advantage  Import goods in which it does not  Trade is advantageous to both parties if the ratio (price) at which goods are exchanged is between the opportunity cost ratios for the two countries. Source: PDClipart.org