..every country has a comparative advantage. For example, imagine if the United States and Mexico both produced tacos and hot dogs. To produce each taco, the United States needs two workers while Mexico needs three. For every hot dog produced, the United States needs one worker while Mexico needs two. The United States holds an absolute advantage in producing both tacos and hot dogs because it can produce both goods with fewer workers. However, Mexico holds a comparative advantage in producing tacos, because it can produce them at a lower opportunity cost. In the United States, every taco made costs two workers, and thus two hot dogs. For Mexico, every taco made costs three workers, and only one and a half hot dogs.
..if Mexico produced one extra taco, the United States could produce two extra hot dogs. In the global economy, there would be the same number of tacos and one more hot dog, indicating a slightly higher standard of living for both countries, assuming they could trade freely.
Thursday, January 24, 2008
Comparative advantage: marginal analysis of trade
From The Richmond Fed:
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