20.1 Absolute and Comparative Advantage - Principles of Macroeconomics 2e | OpenStax

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• There is no modern example of a country that has shut itself off from world trade and yet prospered.

• Absolute advantage can be the result of a country’s natural endowment.

• “geography is destiny.”

• However, thinking about trade just in terms of geography and absolute advantage is incomplete. Trade really occurs because of comparative advantage.

• that a country has a comparative advantage when it can produce a good at a lower cost in terms of other goods.

• the concept of comparative advantage is based on this idea of opportunity cost from Choice in a World of Scarcity.

• The companies that produce either copper or corn tell you that it takes two hours to mine a ton of copper and one hour to harvest a bushel of corn. This means the opportunity cost of producing a ton of copper is two bushels of corn. The next section develops absolute and comparative advantage in greater detail and relates them to trade.

• Saudi Arabia has an absolute advantage in producing oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States. The United States has an absolute advantage in producing corn.

• Thus, in the U.S. production possibility frontier graph, every increase in oil production of one barrel implies a decrease of two bushels of corn.

• The opportunity cost of producing one barrel of oil is the loss of 1/4 of a bushel of corn that Saudi workers could otherwise have produced.

• In the examples in this chapter, we draw the PPFs as straight lines, which means that opportunity costs are constant. When we transfer a marginal unit of labor away from growing corn and toward producing oil, the decline in the quantity of corn and the increase in the quantity of oil is always the same.

• In reality this is possible only if the contribution of additional workers to output did not change as the scale of production changed.

• If Saudi Arabia could find a way to give up less than four barrels of oil for an additional bushel of corn (or equivalently, to receive more than one bushel of corn for four barrels of oil), it would be better off.

• The underlying reason why trade benefits both sides is rooted in the concept of opportunity cost,

• In a trade with Saudi Arabia, if the United States is going to give up 100 bushels of corn in exports, it must import at least 50 barrels of oil to be just as well off. Clearly, to gain from trade it needs to be able to gain more than a half barrel of oil for its bushel of corn—or why trade at all?

• Trade allows a country to go beyond its domestic production-possibility frontier

• reach point D, where oil consumption is now 40 barrels and corn consumption has increased to 30 (see Figure 20.3).