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12 When two countries have mutual absolute advantages, both countries will benefit from trade. Example: US has absolute advantage in wheat. NZ has absolute advantage in sheep. Both countries gain by specializing in one product and trading for other product. 17 COMPARATIVE ADVANTAGE US Iceland Wheat per acre 100 30 Sheep per acre 50 30 US has absolute advantage in both goods. US Iceland Cost of sheep in terms of wheat 2 1 Cost of wheat in terms of sheep 1/2 1 Iceland: comparative advantage in sheep. US: comparative advantage in wheat. 20 Comparative advantage: When the amount of good X that must be given up to produce 1 extra unit of good Y is LOWER in country A than country B, then country A has a comparative advantage over country B in the production of good Y and country B has a comparative advantage over country A in the production of good X. 23 Any two countries will benefit from trade. This is true even if one country can produce ALL goods more cheaply. Each country increases production of the good for which it has a comparative
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Unformatted text preview: advantage and decreases production of good for which it has a comparative disadvantage. 27 Example: US produces 4 more wheat, 2 less sheep. Iceland produces 2 more sheep, 2 less wheat. US gives 3 wheat to Iceland. Iceland gives 2 sheep to US. US is better off: 1 extra wheat. Iceland is better off: 1 extra wheat. 33 Example: Mexico can produce clothes 50% cheaper than US. Mexico can produce radios 25% cheaper than US. Mexico has absolute advantage in both goods. Mexico has comparative advantage in clothes. US has comparative advantage in radios. Both countries will benefit if US specializes in radios and Mexico specializes in clothes. 34 Trade barriers: Tariffs Export subsidies Quotas 39 Reasons often cited to place trade barriers and why they are wrong! 1. Save jobs. 2. Protect against unfair practices by foreign companies, especially “dumping.” 3. National security. 4. Differences in wages, environmental regulations, and other factors. 5. “Buy American”...
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