Globalization and Trade
Why It Matters: Globalization and Trade
Globalization is the process by which the world, previously isolated through physical and technological distance,
becomes increasingly interconnected.
• What are the gains from international trade?
• In what sense do barriers to trade protect American workers and companies?
• What are the costs of globalization? Are the costs worth it?
Absolute Advantage
• The evidence that international trade confers overall benefits on economies is pretty strong
• A country has an absolute advantage over another country if it can produce a given product using fewer
resources than the other country needs to use
• If Canada can produce 100 lbs. of beef using two ranchers, but it takes Argentina three ranchers, Canada
has absolute advantage over Argentina
• Absolute advantage can be the result of a country’s natural endowment
• Saudi Arabia and oil
Comparative Advantage
• Comparative Advantage: when a country can produce a good at a lower cost in terms of other goods; or, when a
country has a lower opportunity cost of production
• The question each country or company should ask with trade should be: “What do we give up to produce
this good?”
• If Zambia produces copper, the resources it uses cannot be used to produce other goods such as corn
• As a result, Zambia gives up the opportunity to produce corn
• Suppose it takes 10 hours of labor to mine a ton of copper in Zambia, and 20 hours of labor to harvest a
bushel of corn
• This means the opportunity cost of producing a ton of copper is 2 bushels of corn
Absolute or Comparative Advantage
If Ryen can make more tacos in an hour than Suzanne, but Suzanne can make more tacos at a lower opportunity cost,
then Suzanne has a(n) ________.
a. comparative advantage in making tacos
b. both an absolute and comparative advantage in making tacos.
c. absolute advantage in making tacos
What Happens When a Country Has an Absolute Advantage in All Goods
• It’s typical that for high-income countries they have well-educated workers, technologically advanced equipment,
etc.
• These high-income countries can produce all products with fewer resources than a low-income country
• If the high-income country is more productive across the board, will there still be gains from trade?
• Trade is about a mutually beneficial exchange
• Even when one country has an absolute advantage in all products, trade can still benefit both sides
• This is because gains from trade come from specializing in
• one’s comparative advantage • Step 1: Make a Table, similar to the one shown
Production Possibilities and Comparative Advantage • Step 2: To calculate absolute advantage, look at the larger
• Absolute advantage simply compares the productivity of a of the numbers for each product
worker between countries • Step 3: To calculate comparative advantage, find the
• Comparative advantage identifies the good for which the opportunity cost of producing one barrel of oil in both
producer’s absolute advantage is relatively larger, or countries
where the producer’s absolute productivity disadvantage • Step 4: Calculate the opportunity cost of one lumber by
is relatively smaller reversing the numbers, with lumber on the left side of the
Mutually Beneficial Trade with Comparative Advantage equation
• When nations increase production in their area of • Step 5: In this example, absolute advantage is the same as
comparative advantage and trade with each other, both comparative advantage
countries can benefit • Step 6: Canada should specialize in what it has a relative
• The production possibilities frontier is a useful tool to lower opportunity cost, which is lumber, and Venezuela
visualize this benefit should specialize in oil
• The production possibilities frontier shows the maximum
amount that each country can produce given its limited
resources
Calculating Absolute and Comparative Advantage