Specialization and Comparative AdvantageThis is a featured page

Specialization: The use of resources to product one or few products.

Production Possibilities Analysis: "Specialization is economically desirable because it results in more efficient production." In the space below, explain this statement.

  • Assumptions and comparative costs:
    • Comparative advantage: A lower relative opportunity cost than that of another producer or country (different from absolute advantage)
    • Absolute advantage: when a producer produces more total products than another producer
    • Base on comparative advantage, we can find out which country is more fit for producing specific product with fixed resources.
    • Terms of trade: terms that are mutually beneficial to the two countries in trade. Where the trade leaves both countries better off than they were originally

    • Gains from Specialization and Trade:
      • "The use of resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.
      • Based on comparative advantage, we can find out which country is more fit for producing specific product with fixed resources. The country should specialize goods or services for which it has the LOWEST opportunity cost. This increases the productivity of a nation's resources and allows for greater total output.
      • improves global resource allocation. Each country would result in a larger global output with the same total inputs or world resources and technology. Countries can overcome the restrictions of their production possibilities frontier through specialization. Trade combined with specialization can ensure that consumers of both countries have the goods they need and the goods they want.

    The graph on the right represents OUTPUT
    , and to put into a table as follows:

    Note: When solving for comparative we need to assume that each of the countries has constant opporunity costs of production between the two products, and that both economies have full employment at all times

    Specialization and Comparative Advantage - Welker's Wikinomics Page

    soybeans avocados
    Mexico 15 60
    USA 30 90

    • USA has the absolutel advantage of both products.
    • Comparative advantages:
      • Opportunity costs for Mexico to produce a)soybeans b)avocados: 60/15=4, 15/60=1/4
      • Opportunity costs for USA to produce a)soybeans b)avocados: 90/30=3, 30/90=1/3
      • Mexico has the comparative advantage of avocados, therefore should spcialize in avocados.
      • USA has the comparative advantage of soybeans, therefore should specialize in soybeans.
      • From the textbook regarding terms of trade: For example, if the US and Mexico negotiate a deal where they trade 1 ton of soybeans for 3.5 tons of avocados, the US can receive .5 more tons of avocados because if it shifted its resources from soybeans to avocados, 1 ton soybeans only yields 3 tons avocados.
    Through trade-->both nations benefit.

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