18 9 9 With trade Maryanne moves toward a specialization in fishing and trades

18 9 9 with trade maryanne moves toward a

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10 Final Example Suppose the United States and Mexico both produce hamburgers and tacos. The combinations of the two goods that each country can produce in one day are presented in the Figure 11 below. Figure 11: Productivity Table Note from Table 11 that the United States has an absolute advantage in both hamburgers and tacos. However, as we just learned, the gains from trade arise from comparative advantage NOT absolute advantage. Since comparative advantage is a comparison based on opportunity cost, we first need to calculate the opportunity costs of production for the two countries. United States Opportunity cost of one more hamburger: (36 24) (20 0) = 0.6 Tacos Opportunity cost of one more taco: (20 0) (36 24) = 1.67 hamburger Mexico Opportunity cost of one more hamburger: (30 20) (2 0) = 5 Tacos Opportunity cost of one more taco: (2 0) (30 20) = 0.2 hamburgers Thus, the United States has a comparative advantage in hamburgers while Mexico has a comparative advantage in tacos. If the United States specializes in producing hamburgers and Mexico specializes in producing tacos, both countries can benefit from trade. To illustrate that point, suppose without trade the U.S. is producing 40 tons of hamburgers and 12 tons of tacos while Mexico is producing 4 tons of hamburgers and 10 tons of tacos. If the United States and Mexico specialize in the good for which they have a comparative advantage, the U.S. can produce 60 tons of hamburgers and Mexico and produce 30 tons of tacos. Note that before trade a total of 44 tons of hamburgers and 22 tons of tacos were produced. After trade, 60 tons of hamburgers and 30 tons of tacos are produced. Since in aggregate, more of both goods are now produced, trade can now make both countries better off.

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