19.2 What Happens When a Country Has an Absolute Advantage in All Goods - Principles of Microeconomics 2e | OpenStax
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Principles of Microeconomics 2e19.2 What Happens When a Country Has an Absolute Advantage in All Goods
Principles of Microeconomics 2e19.2 What Happens When a Country Has an Absolute Advantage in All Goods
Table of contents
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Table of contents
Preface
1 Welcome to Economics!
Introduction
1.1 What Is Economics, and Why Is It Important?
1.2 Microeconomics and Macroeconomics
1.3 How Economists Use Theories and Models to Understand Economic Issues
1.4 How To Organize Economies: An Overview of Economic Systems
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
2 Choice in a World of Scarcity
Introduction to Choice in a World of Scarcity
2.1 How Individuals Make Choices Based on Their Budget Constraint
2.2 The Production Possibilities Frontier and Social Choices
2.3 Confronting Objections to the Economic Approach
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
3 Demand and Supply
Introduction to Demand and Supply
3.1 Demand, Supply, and Equili
ium in Markets for Goods and Services
3.2 Shifts in Demand and Supply for Goods and Services
3.3 Changes in Equili
ium Price and Quantity: The Four-Step Process
3.4 Price Ceilings and Price Floors
3.5 Demand, Supply, and Efficiency
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
4 Labor and Financial Markets
Introduction to Labor and Financial Markets
4.1 Demand and Supply at Work in Labor Markets
4.2 Demand and Supply in Financial Markets
4.3 The Market System as an Efficient Mechanism for Information
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
5 Elasticity
Introduction to Elasticity
5.1 Price Elasticity of Demand and Price Elasticity of Supply
5.2 Polar Cases of Elasticity and Constant Elasticity
5.3 Elasticity and Pricing
5.4 Elasticity in Areas Other Than Price
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
6 Consumer Choices
Introduction to Consumer Choices
6.1 Consumption Choices
6.2 How Changes in Income and Prices Affect Consumption Choices
6.3 Behavioral Economics: An Alternative Framework for Consumer Choice
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
7 Production, Costs, and Industry Structure
Introduction to Production, Costs, and Industry Structure
7.1 Explicit and Implicit Costs, and Accounting and Economic Profit
7.2 Production in the Short Run
7.3 Costs in the Short Run
7.4 Production in the Long Run
7.5 Costs in the Long Run
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
8 Perfect Competition
Introduction to Perfect Competition
8.1 Perfect Competition and Why It Matters
8.2 How Perfectly Competitive Firms Make Output Decisions
8.3 Entry and Exit Decisions in the Long Run
8.4 Efficiency in Perfectly Competitive Markets
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
9 Monopoly
Introduction to a Monopoly
9.1 How Monopolies Form: Ba
iers to Entry
9.2 How a Profit-Maximizing Monopoly Chooses Output and Price
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
10 Monopolistic Competition and Oligopoly
Introduction to Monopolistic Competition and Oligopoly
10.1 Monopolistic Competition
10.2 Oligopoly
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
11 Monopoly and Antitrust Policy
Introduction to Monopoly and Antitrust Policy
11.1 Corporate Mergers
11.2 Regulating Anticompetitive Behavio
11.3 Regulating Natural Monopolies
11.4 The Great Deregulation Experiment
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
12 Environmental Protection and Negative Externalities
Introduction to Environmental Protection and Negative Externalities
12.1 The Economics of Pollution
12.2 Command-and-Control Regulation
12.3 Market-Oriented Environmental Tools
12.4 The Benefits and Costs of U.S. Environmental Laws
12.5 International Environmental Issues
12.6 The Tradeoff between Economic Output and Environmental Protection
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
13 Positive Externalities and Public Goods
Introduction to Positive Externalities and Public Goods
13.1 Why the Private Sector Underinvests in Innovation
13.2 How Governments Can Encourage Innovation
13.3 Public Goods
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
14 Labor Markets and Income
Introduction to Labor Markets and Income
14.1 The Theory of Labor Markets
14.2 Wages and Employment in an Imperfectly Competitive Labor Market
14.3 Market Power on the Supply Side of Labor Markets: Unions
14.4 Bilateral Monopoly
14.5 Employment Discrimination
14.6 Immigration
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
15 Poverty and Economic Inequality
Introduction to Poverty and Economic Inequality
15.1 Drawing the Poverty Line
15.2 The Poverty Trap
15.3 The Safety Net
15.4 Income Inequality: Measurement and Causes
15.5 Government Policies to Reduce Income Inequality
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
16 Information, Risk, and Insurance
Introduction to Information, Risk, and Insurance
16.1 The Problem of Imperfect Information and Asymmetric Information
16.2 Insurance and Imperfect Information
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
17 Financial Markets
Introduction to Financial Markets
17.1 How Businesses Raise Financial Capital
17.2 How Households Supply Financial Capital
17.3 How to Accumulate Personal Wealth
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
18 Public Economy
Introduction to Public Economy
18.1 Voter Participation and Costs of Elections
18.2 Special Interest Politics
18.3 Flaws in the Democratic System of Government
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
19 International Trade
Introduction to International Trade
19.1 Absolute and Comparative Advantage
19.2 What Happens When a Country Has an Absolute Advantage in All Goods
19.3 Intra-industry Trade between Similar Economies
19.4 The Benefits of Reducing Ba
iers to International Trade
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
20 Globalization and Protectionism
Introduction to Globalization and Protectionism
20.1 Protectionism: An Indirect Subsidy from Consumers to Producers
20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions
20.3 Arguments in Support of Restricting Imports
20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally
20.5 The Tradeoffs of Trade Policy
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
A | The Use of Mathematics in Principles of Economics
B | Indifference Curves
C | Present Discounted Value
Answer Key
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
References
Index
By the end of this section, you will be able to:
Show the relationship between production costs and comparative advantage
Identify situations of mutually beneficial trade
Identify trade benefits by considering opportunity costs
What happens to the possibilities for trade if one country has an absolute advantage in everything? This is typical for high-income countries that often have well-educated workers, technologically advanced equipment, and the most up-to-date production processes. These high-income countries can produce all products with fewer resources than a low-income country. If the high-income country is more productive across the board, will there still be gains from trade? Good students of Ricardo understand that trade is about mutually beneficial exchange. Even when one country has an absolute advantage in all products, trade can still benefit both sides. This is because gains from trade come from specializing in one’s comparative advantage.
Production Possibilities and Comparative Advantage
Consider the example of trade between the United States and Mexico described in Table 19.7. In this example, it takes four U.S. workers to produce 1,000 pairs of shoes, but it takes five Mexican workers to do so. It takes one U.S. worker to produce 1,000 refrigerators, but it takes four Mexican workers to do so. The United States has an absolute advantage in productivity with regard to both shoes and refrigerators; that is, it takes fewer workers in the United States than in Mexico to produce both a given number of shoes and a given number of refrigerators.
Country Number of Workers needed to produce 1,000 units — Shoes Number of Workers needed to produce 1,000 units — Refrigerators
United States 4 workers 1 worke
Mexico 5 workers 4 workers
Table 19.7 Resources Needed to Produce Shoes and Refrigerators
Absolute advantage simply compares the productivity of a worker between countries. It answers the question, “How many inputs do I need to produce shoes in Mexico?” Comparative advantage asks this same question slightly differently. Instead of comparing how many workers it takes to produce a good, it asks, “How much am I giving up to produce this good in this country?” Another way of looking at this is that comparative advantage identifies the good for which the producer’s absolute advantage is relatively larger, or where the producer’s absolute productivity disadvantage is relatively smaller. The United States can produce 1,000 shoes with four-fifths as many workers as Mexico (four versus five), but it can produce 1,000 refrigerators with only one-quarter as many workers (one versus four). So, the comparative advantage of the United States, where its absolute productivity advantage is relatively greatest, lies with refrigerators, and Mexico’s comparative advantage, where its absolute productivity disadvantage is least, is in the production of shoes.
Mutually Beneficial Trade with Comparative Advantage
When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. Again, the production possibility frontier is a useful tool to visualize this benefit.
Consider a situation where the United States and Mexico each have 40 workers. For example, as Table 19.8 shows, if the United States divides its labor so that 40 workers are making shoes, then, since 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 the 40 workers in the United States are making refrigerators, and each worker can produce 1,000 refrigerators, then a total of 40,000 refrigerators will be produced.
Country Shoe Production — using 40 workers
Refrigerator Production — using 40 workers
United States 10,000 shoes or 40,000 refrigerators
Mexico 8,000 shoes or 10,000 refrigerators
Table 19.8 Production Possibilities before Trade with Complete Specialization
As always, the slope of the production possibility frontier for each country is the opportunity cost of one refrigerator in terms of foregone shoe production–when labor is transfe
ed from producing the latter to producing the former (see Figure 19.4).
Figure 19.4 Production Possibility Frontiers (a) With 40 workers, the United States can produce either 10,000 shoes and zero refrigerators or 40,000 refrigerators and zero shoes. (b) With 40 workers, Mexico can produce a maximum of 8,000 shoes and zero refrigerators, or 10,000 refrigerators and zero shoes. All other points on the production possibility