Comparative Advantage

6 reasons for free trade

1. Consumers benefit due to lower prices by increase income and greater variety of products. 2. Productively Efficient (Comparative Advantage) 3. Decrease monopolies 4. Increase competition 5. Economic growth 6. Promotes Peace between countries

Mexico v United States Terms of Trade 2 Points

1. If the U.S. 1V=1B they must get more than 1V for trade to worth it. If Mexico is 2V=1B than they must give less than 2V for trade to be worth it. 2. If world demand for vegetables is weak relative to supply and beef demand is strong relative to supply than U.S. will get more of the benefit of the trade. If vegetable demand is strong and beef demand is weak than Mexico will get more benefit to the deal.

Mexico v United States Opportunity Cost and Comparative Advantage

1. Mexico Opportunity-Cost Ratio: 2 Vegetable: 1 Beef U.S. Opportunity-Cost Ratio: 1 Vegetable: 1 Beef 2. U.S. has a comparative advantage in beef over Mexico because Mexico produces only 1 beef for 2 vegetables where U.S. produces 1 beef for 1 vegetable. Mexico has a comparative advantage in vegetables over U.S. because it only need 1/2 beef for 1 vegetable where U.S. needs a whole beef for one vegetable.

3 Facts about trade with increasing costs

1. Specializing in one product causes the cost in that product to increase. 2. Resources between two product aren't perfectly suitable which increase cost causing a curve instead of a constant cost. 3. Countries slowly shift towards less than complete specialization or end trade deal.

2 Gains from Trade

1. countries can get more of what they want through trade than they could if they tried to be self-sufficient and achieve economic growth. 2. Countries don't need international trade but can reach a point beyond its own ppc.

4 Facts of terms of trade

1. the ratio at which a country can trade its exports for imports from other countries. 2. establish if specializing to trade is worth it or to just be self-sufficient. 3. If a country can't get more of their exchange ratio, the trade isn't worth it. 4. international demand compared to for one product vs the other will determine the terms of trade.

Comparative Advantage 6 Assumptions

1. two nations 2. constant costs of production 3. different cost between two countries in two products being compared 4. same sized labor forces 5. one country has absolute advantage in both products 6. One country has more product possibilities because they have more output per worker.

opportunity-cost ratio

An equivalency showing the number of units of two products that can be produced with the same resources. Ex: Produce 30 vegetables and 60 beef ratio is 1V=1B

self-sufficiency output mix

Each country must choose some output mix on it production curve that provides the greatest total benefit.

Specializing based on Comparative Advantages:

If both nations come into agreement then both can increase both products by specializing in the product they have a comparative advantage in.

absolute advantage

a country is most efficient producer of that product meaning they produce more output with the same input.

less than complete specialization

country mostly specialize in one product while producing a little of another.

comparative advantage

country's ability to produce a good at a lower opportunity cost than another producer

free trade

international trade free of government interference

trading possibilities line

shows the amounts of the two products that a nation can obtain by specializing in one product and trading for the other

principle of comparative advantage

total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good