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19.2 What Happens When a Country Has an Absolute Advantage in All Goods - Principles of Microeconomics 2e | OpenStax Skip to Content Principles of Microeconomics 2e19.2 What Happens When a Country Has...

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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
Answered Same Day Jul 13, 2021

Solution

Somudranil answered on Jul 14 2021
145 Votes
Running Head: Globalization        1
Globalization        2
    
GLOBALIZATION
Globalization for long has been instrumental in spreading as a catalyst for imposing upon the world that institutions have led a widespread flow. The flow had been in terms of goods, ideas, services and capital that led to the integration of the societies as well as economies. There has been an ensuing interdependence that have been created in the economy had led to the growth in the scale pertaining to the trading of the commodities and services belonging to cross-border. The flow...
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