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  • Comparative Advantage

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    Isa SuMe01
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    The document discusses comparative advantage and how even if one country has an absolute advantage in producing both goods, both countries can still benefit from trade as long as their relative costs of production are different. It provides examples using two countries and two goods to illustrate how comparative advantage allows both to gain by specializing in the good they can produce at a lower relative cost. Key assumptions of the model include limited resources, constant production costs, and no trade barriers between the two countries.

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    The document discusses comparative advantage and how even if one country has an absolute advantage in producing both goods, both countries can still benefit from trade as long as their relative costs of production are different. It provides examples using two countries and two goods to illustrate how comparative advantage allows both to gain by specializing in the good they can produce at a lower relative cost. Key assumptions of the model include limited resources, constant production costs, and no trade barriers between the two countries.

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    © All Rights Reserved
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    6 views15 pages

    Comparative Advantage

    Uploaded by

    Isa SuMe01
    The document discusses comparative advantage and how even if one country has an absolute advantage in producing both goods, both countries can still benefit from trade as long as their relative costs of production are different. It provides examples using two countries and two goods to illustrate how comparative advantage allows both to gain by specializing in the good they can produce at a lower relative cost. Key assumptions of the model include limited resources, constant production costs, and no trade barriers between the two countries.

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    of 15

    2.

    Comparative Advantage
    ● Antecedent: David Ricardo (1817) – he thought a country could have absolute advantage on both
    products.
    ● Opportunity cost: the sacrifice a country must do in order to produce a good and not a different
    one.
    ● Relative prices: Price of one good in terms of the price of another one within a specific country.
    ● Relative prices are the basis for making decisions about what a country prefers to produce, to export
    or to import.

    What if a country is
    not good at
    producing anything?
    2. Comparative Advantage
    ● Both countries can take advantage or gain from trading with each other, as long as their
    relative advantages/disadvantages in producing the different goods are not equal to
    each other.

    ● Assumptions: MODEL 2X2

    ○ 2 different countries and 2 different goods.


    ○ Limited amount of resources in each country.
    ○ Constant production costs (each produced units needed the same amount of
    resources).
    ○ Perfect Market: no tariffs or differentiated taxes.
    ○ No transportation costs.
    ○ Free mobility of production factors (K and L) within each countries.
    2. Comparative Advantage
    ● VIDEO: https://www.youtube.com/watch?v=U12yZXBmQmY

    ● Math Exercise:
    ○ Total resources in each country: 1,300R
    ○ Two countries: Morocco and Congo
    ○ Two products: Camels and Diamonds
    ○ In Morocco: 100R per Camel; 130R per 1ton of Diamonds
    ○ In Congo: 65R per Camel; 52R per 1 ton of Diamonds

    ● Which country has the absolute advantage? Morocco or Congo?


    2. Comparative Advantage
    2. Comparative Advantage
    ● Conclusions:

    ○ Even if one country is more productive in absolute terms in the production of all goods and
    services and another country is less productive in absolute terms, both can gain from trading
    with each other, as long as their relative advantages/disadvantages in producing the different
    goods are not equal to each other.

    ○ At the very least, one country will gain from trade without making the other worse off and, in
    many cases, both countries will gain from trade and share the benefits of higher overall
    productivity.

    ○ A country will have a comparative advantage even if they have no absolute advantage.
    2. Exercise in class

    ● Resources: 1.500
    ● Countries: Colombia and México
    ● Products: Coffee and Flat Steel
    ● Constant Production Cost:
    ○ Colombia: 100R per ton of coffee; 150R per ton of flat steel
    ○ México: 75R per ton of coffee; 60R per 1 ton of flat steel

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