Country
Change in the production of
iPads
Cl-15 yards
China
-3 sets
+15 yards
Change in the World Output
+2 sets
0
As the U.S. transfers 1 worker from cloth production to iPad production, its
The gain from production and trade is the increase in the world output that results from each country specializing in its production according to its
Two assumptions, within each country:
Labor is the only factor of production and is homogeneous (i.e. of one quality).
The cost or price of a good depends exclusively upon the amount of labor required to produce it.
Cloth
Relative cost
U.S.
5 sets
15 yards 1 iPad=3 yards of cloth
China
1 set
5 yards 1 iPad=5 yards of cloth
The U.S. labor has a 5-to-1 absolute advantage in the production of iPads. The U.S. labor also has a 3-to-1 absolute advantage in the production of cloth. The U.S. has a greater absolute advantage in producing iPads than in producing cloth.
In like manner, the U.K has an absolute advantage in cloth production.
Chapter 1 Classical Theories of International Trade
1.1 Mercantilism 1.2 Trade Based on Absolute Advantage: Adam Smith 1.3 Trade Based on Comparative Advantage: David
Ricardo 1.4 Comparative Advantage and Opportunity Cost 1.5 Comparative Advantage with More Than Two
Commodities and Countries 1.6 Theory of Reciprocal Demand 1.7 Offer Curve and Terms of Trade
1.2 Trade Based on Absolute Advantage: Adam Smith
An arithmetic example
A Case of Absolute Advantage
Country
Output per Labor Hour
iPad
Cloth
U.K.
5 sets
20 yards
The more efficient country should specialize in and export that good in which it is relatively more efficient (where its absolute advantage is bigger).
1.3 Trade Based on Comparative Advantage: David Ricardo
Assumptions of a simplified model There are only two countries with a fixed level of technology in the world; Each country owns only one input – labor, which is fixed endowed and homogenous and can move across industries but cannot flow across countries; Each country produces two commodities; Perfect competition and free trade prevail in markets.
The less efficient country should specialize in and export the good in which it is relatively less inefficient (where its absolute disadvantage is smaller).
1.3 Trade Based on Comparative Advantage: David Ricardo
An Example of Comparative Advantage
A Case of Comparative Advantage
Country
iPads
Output per labor hour
U.S.
15 sets
10 yards
The U.S. has an absolute advantage in iPad production; its iPad workers' productivity (output per worker hour) is higher than that of the U.K, which leads to lower costs (less labor required to produce a set of iPad).
Cost differences govern the international movement of goods. The concept of cost is founded upon the labor theory of value.
1.2 Trade Based on Absolute Advantage: Adam Smith
Critics Possible only for short term Assuming static world economy
Chapter 1 Classical Theories of International Trade
1.1 Mercantilism 1.2 Trade Based on Absolute Advantage: Adam Smith 1.3 Trade Based on Comparative Advantage: David
International Economics
Chapter 1
Classical Theories of International Trade
Chapter 1 Classical Theories of International Trade
1.1 Mercantilism 1.2 Trade Based on Absolute Advantage: Adam Smith 1.3 Trade Based on Comparative Advantage: David
output of iPads increases by 5 and cloth production falls by 15 yards.
As China transfers 3 workers from iPad production to cloth production, its cloth production increases by 15 yards and iPad production falls by 3.
Ricardo 1.4 Comparative Advantage and Opportunity Cost 1.5 Comparative Advantage with More Than Two
Commodities and Countries 1.6 Theory of Reciprocal Demand 1.7 Offer Curve and Terms of Trade
China has an absolute disadvantage in the production of iPads and cloth. However, China’s absolute disadvantage is smaller in producing cloth than in producing iPads.
1.1 Mercantilism
The mercantilists advocated government regulation of trade to promote a favorable trade balance.
If a country could achieve a favorable trade balance, it would receive payments from the rest of the world in the form of gold and silver. Such revenues would contribute to an increase in spending and thus a rise in domestic output and employment.