This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here.
Comparative advantage is an idea that helps explain why individuals and countries trade with each other. Trade is at the heart of modern economies: individuals specialize in production and generalize in consumption. To consume many goods while producing relatively few, individuals must sell what they produce in exchange for the output of others. Countries likewise specialize in certain goods and services and import others. By so doing, they obtain gains from trade.
Table 17.4 shows the productivity of two different countries in the production of two different goods. It shows the number of labor hours required to produce two goods—tomatoes and beer—in two countries: Guatemala and Mexico. From these data, Mexico has an absolute advantage in the production of both goods. Workers in Mexico are more productive at producing both tomatoes and beer in comparison to workers in Guatemala.
|Hours of Labor Required|
|Tomatoes (1 kilogram)||Beer (1 liter)|
In Guatemala, the opportunity cost of 1 kilogram of tomatoes is 2 liters of beer. To produce an extra kilogram of tomatoes in Guatemala, 6 hours of labor time must be taken away from beer production; 6 hours of labor time is the equivalent of 2 liters of beer. In Mexico, the opportunity cost of 1 kilogram of tomatoes is 1 liter of beer. Thus the opportunity cost of producing tomatoes is lower in Mexico than in Guatemala. This means that Mexico has a comparative advantage in the production tomatoes. By a similar logic, Guatemala has a comparative advantage in the production of beer.
Guatemala and Mexico can have higher levels of consumption of both beer and tomatoes if they trade rather than produce in isolation; each country should specialize (either partially or completely) in the good in which it has a comparative advantage. It is never efficient to have both countries produce both goods.