Chapter 2 - Absolute Advantage Chapter 2 Why Countries...

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1 Chapter 2 Why Countries Trade Tutional BBA International Economics. 2 Absolute Advantage Assumption 1. There are only two countries: US and India. 2. Both countries produce two goods: Machine (M) and Cloth (C). 3. Labor within a country is homogenous and is the only factor of production used to produced both goods. 4. The U.S. and India have a fixed amount of labor to produce the goods and that within the U.S. and India labor is fully employed. 5. The level of technology used to produced the goods is constant and production cost is constant. 6. Goods can move freely. 7. But labor is immobile between countries. 8. Transportation cost are zero. 9. Barter system. 3 15 yards of cloth 2 Machines India 10 yards of cloth 5 Machines U.S. Cloth Machines Country One person Per Day of Labor Produces • Conclusion from the table. ¾ U.S. workers are more productive in machine production. ¾ Indian workers are more productive in cloth. 4 The Gains from Specialization and Trade with Absolute Advantage. When the trade opens up, in our example, for each worker that the U.S. transfers from cloth production to machine production. M l . ....... units, Cloth l . ........ yards. For each worker that India transfer from machine production to cloth production. C l . .... units, M l . ....... units. As the table in next page indicates, world output increase by 3 machines and 5 yards of cloth.
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5 ........... ....... Change in World output +15 yards of cloth
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Chapter 2 - Absolute Advantage Chapter 2 Why Countries...

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