2.2--comparative advantage, trade, and globalization

7/30/2019 2.2--Comparative Advantage, Trade, And Globalization

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McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Comparative Advantage

and Trade

2-1


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2-2

Economic Growth In the

Past Two Thousand Years$6,000

$5,000

$4,000

$3,000

$2,000$1,000

2010150010005000

P

ercapitainco

me

(in1990dolla

rs)

WHY?


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The Economics of Babe Ruth

2-3


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Babe Ruth Statistics

Boston Red Sox Pitcher

1915 18-8 2.44

1916 23-12 1.75*

1917 24-13 2.011918 13-7 2.22 *Means

New York Yankee Right Fielder led the

1918 11* .300 league1920 54* .376

1923 41* .393*

1927 60* .356

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Comparative Advantage

Comparative Advantagethe relativelymost productive use of a resource

Hitting was the Babes comparativeadvantage

Very good pitcherplayed every 4-5 days

Great hitterplayed every day and changedthe game forever

Specializedpitched a total of only 5games after 1919

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2-6

Production Possibilities

Without TradeProduction Possibilities Curves

for Pakistan and Belgium

What does each country dobest? Hint: Think opportunitycosts.

1 2 3 4

4

3

2

1

5

Chocolate (in tons)

Textiles

(inthousandsof

yards)

Belgium

Pakistan

A

B

E

D


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2-7

Specialization and Trade

How could they get to point C where eachcountry can consume 2,000 tons of fabricand 2 tons of chocolate?

1 2 3 4

4

3

2

1

5

Chocolate (in tons)

Textiles

(inthousandsof

yards)

Belgium

Pakistan

A

B

C

E

D



2-8

Specialization and

Comparative AdvantageFor Pakistan the opportunity cost of one ton of chocolateis 4000 yards of textiles.

For Belgium the opportunity cost of one ton of chocolateis 250 yards of textiles.

Belgium has the comparative advantage in chocolateand specializes producing 4 tons (point E). Pakistanhas the comparative advantage in textiles andspecializes producing 4000 yards (point D).

1 2 3 4

4

3

2

1

5

Chocolate (in tons)

Textiles

(inthousandsof

yards)

Belgium

Pakistan

A

B

C

E

D



2-9

Comparative Advantage and

the Combined PPC

1 2 3 4 5

4

3

2

1

5

Chocolate (in tons)

Textiles

(inthousandsofyard

s)

Belgium

Pakistan

H(4,4)

F (0,5)

G (5,0)

Note how much more they canhave if they specialize and trade

The combined PPC is the curveconnecting points F, H, and G.

. C (2,2)



2-10

U.S. Textile

Production and Trade

Two hundred years ago, the U.S. had acomparative advantage in textileproduction.

Now countries with cheaper labor, suchas Bangladesh, have the comparative

advantage in textiles. The gains from trade are higher wages for

workers in Bangladesh and lower-pricedcloth for U.S. consumers.



2-11

Comparative Advantage Review

Suppose that the U.S. can produce 100 computer chips

or 100 video games in one hour. Japan can produce 40computer chips or 80 video games in one hour.

What is the opportunity cost of computer chips in each

country?

In which product should each countryspecialize?

The U.S. is more efficient in producing both computerchips and video games. Can the U.S. benefit by tradingwith Japan?



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In the U.S. the opportunity cost of 1 video game is 80/80= 1 computer chip.

In Japan the opportunity cost of 1 computer chip is 80/40= 2 video games.

U.S. should specialize in computer chips.

Produces 100 per hourJapan should specialize in video games.

Produces 80 per hour

They agree to trade 1 computer chip for 1.5 video gamesU.S. gets video games for 2/3 of a computer chipJapan gets computer chips for 1.5 video games

Both countries have reduced their opportunity costs



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Comparative Advantage and

Outsourcing Outsourcing : The relocation of production once

done in the U.S. to foreign countries.

Outsourcing occurs because of comparativeadvantage

What is the comparative advantage of countries such as India

and China? What is the comparative advantage of the U.S.?

What economic activities are being outsourced?

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2-14

Globalization Globalization: The increasing

integration of economies, cultures,and institutions across the world.

The positive effect of globalization isthat it provides larger markets than thedomestic economy.

The negative effect is that it results inincreased competition.

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2-15

Law of One Price

Wages of similar workers in one countrywill not differ significantly from the wagesof workers in another institutionallysimilar country.

If the U.S. loses its comparative advantage

based on technology and institutionalstructure, U.S. wages will decreaserelative to wages in many other countries.

2.2--comparative advantage, trade, and globalization

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