Académique Documents
Professionnel Documents
Culture Documents
Advantage
24
Absolute advantage
Built on the ideas of Adam Smith (1770)
Absolute advantage exists between nations when
they differ in their ability to produce goods.
More specifically, absolute advantage exists when one
country is good at producing one item, while another
country is good at producing another item.
Same input => more output
Same output => less input
25
Machines
Cloth
EU
5 machines
(or)
10 sq. meters
India
2 machines
(or)
15 sq. meters
Assume TWO Persons per day, so that each product can be fully produced
Machines
EU
5 machines
India
2 machines
World Output
7 machines
Cloth
(and)
(and)
(and)
10 sq. meters
15 sq. meters
25 sq. meters
Machines
EU
10 machines
India
0 machines
World Output
10 machines
Cloth
0 sq. meters
30 sq. meters
(and)
30 sq. meters
Machines
Cloth
U.S.
5 machines
15 sq. meters
India
1 machine
5 sq. meters
1 Machine = 3 cloth
1 Cloth
= 0.33 machine
1 Machine = 5 cloth
1 Cloth = 0.2 machine
Machines
Cloth
U.S.
5 machines
15 sq. meters
India
1 machine
5 sq. meters
Let us allow India to produce cloth up to the level that the U.S. can
Machines
Cloth
U.S.
5 machines
India (3 days)
-3 machines
15 sq. meters
World Output
+2 machines
(per)
0 cloth
.
Country
Japan
Malaysia
1 car = 1 steel
1steel = 1 car
1 car = 2 steel
1steel = 0.5 car
Cars
Steel (tons)
0.5
Let us allow Malaysia to produce steel up to the level that Japan can
Cars
Steel (tons)
Japan
-2
Malaysia (2 days)
-1
World Output
+1
16
National security.
Factor Endowments
Some countries have more capital => cheaper
rent => comparative advantage in capital
intensive products
Some countries have a larger labor force
=>cheaper wage => comparative advantage in
labor intensive products
18
Economies of Scale
Increase in production leads to lower
average cost, and vice versa
Choice of specialization is completely
accidental
19
US$
Cambodia
20,000
40,000
Japan
10,000
30,000
20
Corn Sunscreen
Mexico
300
150
France
150
200
1.
2.
3.
Sunscreen?
(What is the
and sunscreen
?)
Wheat Cloth
United States
1 hour 2 hours
Canada 3 hours 4 hours
1.
2.
3.
4.
In producing cloth?
In producing cloth?
Alpha
Beta
Guns
Guns
400
300
200
Butter
100
Butter
Cloth
Portugal
England
10
20
20
60
Soybeans
Mexico
16
USA
Avocados
6
8
Soybeans
Mexico
Avocados
15
60
USA
30
90