The Gains From Trade

Alpha

-After specialization Before specialization

-After specialization Before specialization

Alpha's opportunity cost of production: 8 cashews = 40 coffee, or 1 cashew = 5 coffee.

Alpha's opportunity cost of production: 8 cashews = 40 coffee, or 1 cashew = 5 coffee.

Cashew Nuts

Beta

Before specialization

/ Beta's opportunity cost: N.

! 6 cashews = 6 coffee, \

rh

I or 1 cashew = 1 coffee, 1

\ Beta is the lower cost J

\ cashew nut producer.>^

^vb^^After specialization

Cashew Nuts

Cashew Nuts

Total Output Before Specializing

Total Output After Specializing

Alpha Beta

Alpha Beta

Coffee 20 + 5 = 25 Cashews 4 + 1 = 5

Coffee 40 + 0 = 40 Cashews 0 + 6 = 6

(Coffee and nuts measured in pounds)

(Coffee and nuts measured in pounds)

Using Graphs If Alpha and Beta each specializes in the product it can produce relatively more efficiently, total output for both countries goes up. After specialization, each country would trade its surplus production with its neighbor. Does Alpha or Beta have a comparative advantage in the production of coffee?

CHAPTER 17: INTERNATIONAL TRADE 469

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country is still beneficial. This happens whenever a country has a comparative advantage—the ability to produce a product relatively more efficiently, or at a lower opportunity cost.

To illustrate, because Alpha can produce either 40 pounds of coffee or 8 pounds of cashew nuts, the opportunity cost of producing 1 pound of cashew nuts is 5 pounds of coffee (40 pounds of coffee divided by 8). At the same time, Beta's opportunity cost of producing 1 pound of cashew nuts is 1 pound of coffee (6 pounds of coffee divided by 6). Clearly, Beta is the lower-cost producer of cashew nuts because its opportunity cost of producing 1 pound of nuts is 1 pound of coffee— whereas Alpha would have to give up 5 pounds of coffee to produce the same amount of cashews.

If Beta has a comparative advantage in producing cashews, then Alpha must have a comparative advantage in coffee production. Indeed, if we try to find each country's opportunity cost of producing coffee, we would find that Alpha's opportunity cost of producing 1 pound of coffee is 1/5 of a pound of cashews (8 pounds of cashews divided by 40). Using the same computations, Beta's opportunity cost is 1 pound of cashews (6 pounds of cashews divided by 6). Alpha, then, has a comparative advantage in coffee production, because its opportunity cost of production is lower than Beta's.

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