opportunity

lnternational Egonomics, 15th Edition 49

l

l

l

{hapter 3 \Ijirr El'rrrix'til;1}rrii"s: ii"'ri1"ir'r1rrt \ l' ?il {i

l

lrade. anci woil't the Llniteci States be hLtrt by liee ir*rltrf \'Ve ht*t n{jxl i0 tlte tlieori

rhat filsr answcfecl iftese j'ears aliil esiablisheei a {irnclaplental 1:rincipk: o1j iuterlla-

tional trrde. ]

'' ' tI ': : : ' :'

l

Ilavici lticareicl's nrair': citutt'ibutitiii ttl ot tL Lln{lfr'stixld;ligl0l intclilllllolral lrar1e ri'as 1ct

sho$r that thcre is a basis lcr bcttef icial irllrie $'lteth*r,:tlttur e-i ttttitics hiioe iit-)'at's'-

lutc rirlv;:rrtiige . llis r:outril'rrttiotr is b'.rse{ rx a carel-ui *xqtninatiort ol oppcit'lrtnity cttst'

I'lre , ,:-,, : t:. , : ' . cf pt<lritreing tttot'e: rila prcciirct]1'1.1t:1.tl"t'O is the aittotittt of

produr:{ion o1'the other proriuct 1fr*i-i1 g-ivcn up' T'he oplpor'lLtttity ctist exists bec:tLtse

i]roilLrctiuir rest)r.lrcfs rnlrst hr: shilitcl fl"or.rr thc other {lroducl to thii prodrict' {lVt

ah.enii.1, userl this idcl in tlte disc:r,issit.rtt oial,sillttie arlvdt:tage' whett $'e shifii:il!abor

!i"orri Frl;clLtcirtg otte prciiltct lo procluciiir-: lltc othet'p,tt"]:':l'']

. - Ricarrltr's rvt'itings in th* carl-v lQth centtrr'-v cl*lTionstratert tlre

''' ":':: ' :: ,\ errtttttry rr iil r,rptli.r tii'' gtrtltls,attti sci.r.it't'r tltirt it cltt

proeluce rt a lo'v opporlr-rnity cost ancl irrlport'tlie goof s antl set'r'ices that ii w*ulti

erthenrise ltrorlrtce af a high oppoltLtttity' cost'

f

'i lrc key rvortl itere is ,-:uttpttruti'c, nieaitittg "r,el'lltF

-.ti]|,.;""t necessari13" abso-

1rite.-'[r,r:rt if otle coLtntrf is absoltrteiv tlor': pLtltlucrrve 'tt ltliltlitciilg t:r'cl'ytltittgi iilid

ihe cthe| collntf,v is absclirtel.v 1e ss ir|cclncfive . the-v boiil c:rr-Lgai*

i0]' trldi$!l $'illt eliclt

other ns long as th,*ir i'e1atlve (ciis)iii1r'anlagt's irr rnrif irl$ fiiicLlll

goticis itt"* tlilterett!'

L:ach ccilrtry,.can lTelef it ll'orn tracic b.v exi.l,'tirtg ptotlLr$s itt ri'ititlt it has the greatt:st

rciarivr: acivarrragr: (r:r' le*st li,:lativr-' disaclt';urtage ) itrl{i irn}rorlir;q ll:l:::t ,tj]..]:ii:i

rl llts tltr' l.'.rst ti'llttii'e lrdrittttllr:c {ut lllt: gl'Jillt'sl rclJltr.' lllsil(i\illrlill)()} l(llirr(ru \

approa.e n is actrially a eloLrl-:le cr:nrparison i"ut** ctiitrtttics -::TilY: l::*ii:l:, [iir.iti|u(|1.()\el.I0ll}|,tltcllttirriiiitltasirtllrlttlittttet.icitl\.\i.llllll1lE'Iq;1t1i"11.irt11

tr.adLtrgt\r,o pr.orlucts (clotli attcl rvilte) bctn"cctr ir'r,'o ctlitltlti*s iEnglAnci and 1)oLtLtgal)'

lier.e is it siu.riiar.illustrirtioti. usins rvheiti ancl cloth in ltlre urriterl states atld tlie r'-'st

of ihe *,oi'llt: l

ln the l Uniteri States f

l

)

'4.4 )u

ln the $lest of the World

1{l 067

'I 0 nl;1)

n lr-

05

!rocl irr:ttvily. [.]rrils cf clotli pet lal-'ot hoi:t tJttiis of wheat per !ahol ltoiti

l,;rbor !roLri"s to I'nake. i uniI r:f cloii.l I r,tntt of wheai

l.{r-.rr-.Oltf c0r:rrtrli has inf'eriorprcrihlcfivitv itl botll gootrls l'lte l'lliit*rl $tates ltas;lbsr'i-

ir.tte disadvantagc-s in bolh goocls'--1ot,.,c]'proclLri'rir'it1'f ,':,1::'gt:t, tlittrtbets r:J'ltoLtt"s to

procl-rce 'ue

u'it rr1'eacl] goilcl. What prod*cts {il'ally}'ivi1l ilte lJriiled '{itates *r'pot't itr

i*rpor.t,J i,tau tracic bririg riet nati.ual gaitts t* both c*rrht'res'l

l

l

l

l

50 lnternational Economics - tlol' 1

fr*r'i flne I h, ' ,. /. i ' ' j

As iti ti;c :rbsr.,-1rtte-atir'aillalle clse" 1'\€ call begit bv irtuginirl'I thi:

tw{} l(}tiuiflfs

)clllll'a1jl\''rillr rio i'"ti* tttlrt"tl"ll lllclll l lrcl'

''t"'rlrr't t"ill l'tt't"'l() lrr()(lilei'lrtrtil 1ri'orl-

ri.'ti i() tlii'.'l ior':tl (lL'llratl(l: ll't'tlt''' l\\1r {ll'"'fu']tt iilr;'r ttrll tlrl'nllrtltrui lrtit'":

h;'' irr

ral-,h (oiirllr-v,l \Viih *;';;;;;i..',;r. 1rri.r* iriit. *1" pr,rrf,,ctt \\iithrrr r-''clt tt'itttilt\'

i\iil

br: delcr.lrrillr:d'n1,'corrciitiotis r,vitlritl enl]h coul]irv l'o kecp ottl liictls

oi-r lflil \iA1tl';s

ilttiJael,Lii,ili':1^\!'r]2t-igOitlgt0rr'ytorgrrtx.c,....,',*11,'{btas1<-.n1ti.lS\.\ldciln.ll.;tlitcrtl:;ttl *-,c,kirrg *t rrro{rr-,v,r,r;i, i:irll;,01,.-.."','it',t"'ii"i'aurr'trs

pcr :vi'r"nt r'rttit)" '.'c rvi1l Ltsc

tiic ';;1;.;;;i;;,' o1'. ]],.,.t.oi1,,i.* 'u at.}olilel lji0.lLict 1lt.icc.

li.r lrs if

\\,c iitr ig a 1,ot'gi .,t'irir*,r',tt1"rer" a wollrl o1'Llarle r br:irvce tt t'e li1

prociitti:; lilr-c $'ltciti

ittt<i clt;tit.l :fiitiuetitive i:'ri'kets, pt'oilLtci pricrs Lr:i-itct.

,,,-i::l':1,,'ill ,1ii1i';$::i:i l;::';::t:'?;:'';:'i,'ilil;"i:i:::lt,**',1;;;';l,ll labor iti thr L;ilitcel Stittc'c coirld i"iodriee.

*iiher 2 wlical itttiis or

.r i ciorh Lirit is rr,*rl"i",rr**t-,,i-i,rr;n rir. irnit.rr states. ('r*'o u'irr:at r-irrils

is.1so t'lre

o'rrorrL'irv c*si of ;;;;;; .roiiiirr tire ii,,ii*ir .gi.,*s--p'.ch;ct

'rie cs rcriecr cos's.' )

rn rhe resr r.,t-the r,,,or.1J.;,;- ilr,, *f iarrcx'*ui.ifr:o,r,t:* ] :i"'lt,itttit ci 2r'l rvheat uutt'

i.ire prrr:* i^,,,1 ,t.,. .,ip;;;;r, ;il -r r.i"ii t-rnit is 0'61 ''vlteiti Liitit

itt i.c t'est ert'

1'e r'*r^lei. tirtrs. r'itliiii rrte rrr. isolat':cl *tt'nt'n-,1*o' itittit-rtiai piir:'ls rvr'tr-t1tl

1ol1r"r*'tit*

t'elalir'* lai-'r'rr cElsts tl cloth attr'1 u'heat:

\l'Jiih no irrletnaiiunal it':de

irlire i:f cio{h Ptice r:i ',.'rlrc,ai

ln the Llnited States

7.C WlC C r: CIW

1n the Rest *f the Weirld

'i).67 Wli 1 \ (./\'hl

ws t'ili rrsr: tlte notaii.rrl Il'lo rclcr to.r'l4lcai i-tnits atrei i'to rcic'tr: cloth Ltttits''l'lie

r.ciari'c liricc Lil e 1.rt, '.r',-..,.nrur*d

as ri,*r;ri ;;,;;; ;;;'t;;it ol cloth ( ll;{')' artii thc t'e,:'r-

tiic pi.iee ol whirat,jlsi:;,;;,.;;; tt-at ttrc-ri is t'eallv onlv Utlc t'atio

irt er"ch cillrnlry

l;cciit.istllt*pt.iceo,*lre,rtisjristtlrel.r:cilrr.rrc:tloi't1tc-1lric*oi.eiolh. h,lo*, lcl r.r,:i** '*

porriLrf ..'bclr.,'ei:ir ,n,,'il,,it.'rt'ii*i*u iti"trl tlt. t'esl oi' "Lhc "rr:;rl*'

5Lrnlr.hod\, n'irt nuri.5'iir]'riutitt',* itt"t"t"''l"l 'rational

prices 'ult each go.ct attd

rvil1 ir.r,to 'iotit

tron.,,i ,ririiiti,'.n...11,. p;l;;i;i* is sirrrpie'attei tttii'etsitl: As ltttttr as

,r.ices tlil,ir:r.rn,*,o pi*.*'n iiri',uor* tillitl aitl'cost oitrattsilofting'nel:r'ecn

tlli: 'iaees)'

ih.'r'i.: is i1',1'&1'10pr0t'ittltt'or'rglt '--it"ti-;;;;it;1qu' pf icc in orte i:ltce atxi

illtt:ll';:l'i1,1'l;:'i,]}ii:":l'l fr.. "r

s*ndi'g'1".1,.11'rrrc Lr'ittrr sl:-tt* ir

*xciiriirge ii-.r Lj.S. r',,i,.rni.'i'onridel th*

"tO"'"*.: Ottt*'llil.t,l]- llersorl corrlri

ntlilie'

5h* tcrrLtit'es cio{h i'1:it; ';';;irtt'- "u'ia'';';';;};, a'67 t'' t-trr each ciotir unii' slte

:, 3i

i':.;:, rir,iii{::!:t!t:,.',;fi

lnternational EcQnomics, 1 5th Edition 5t

Chapter 3 \\iil'i ELtirl'i''1r Tlitlrs: ('-r;i;tir'rtrllii" r\rii'i'11lrtli

fhen shi;ts this clorh tri tlte l.rrlitccl Sfafes ancl se11s il there for"2'{J i'ii 1;*t'clotlt i:nit'

16 kr.:r:p thilgs sitpplc. \,ie \\'iil usilallY assiil'l1e that thc e:ostcf tt'attsll'Jrting pl'ocltttlls

bet\lreen ilte couttlries is r-ero't Therelore. b3'bu5"ing lov'' (ai 0'(r7) arrii seiling higlt iat

2.il). shc cart ntak(] iril arbilragc p|ofit ol i.:l W' lcr eacll cloth unir tlial sltc exlrol'ts

tl}l thc r.es1 oi-thc r',ot'ld {and iltilrorts illto the tjnitt:ci States)'.'sottlr':Lrocly clsi: cortlil

profit Lrv acrluit'ittg rt,heilt jn the tJnitecl States rt the ior'v prrce ol'{}'5 ('per wlical itrlit'

shipping riie $,heat to lhe |est oltlte t,oricl arlcl sellln;g irfb| thr: itich*r ltrice of i'5 {'

lict'uitr':it tittit. 'l he opcniug 01-pt'oi'itlblc illifflliltiLrllali t|acle r'r'il!

stari pushiilg tite trvo bfp;iriltu

rr*ional pricc latiils to11raLil a 1lfw r,,'ot'1';lrvide equiliblrLlnr' As pecl;1e

.re trt*ve .clittlt

il.ttnr tlrc rest of tlte r.;'t'l11 ll' exportiirg it. clotir i.,*ct"-t''*;'.m{']te exp{rllsir'* t'elltiye io

wheat in ihe lest ttJ'the r,vr':rld. \,ieltiir.vitilc, c1otli becotnes cheaper in thc Unilcci States'

ti.rar:ks to rire atliiitional srti:rpi-v o1'cloth irrporteri {iant the i'*st tiltiic rvorlil' so' cltith

lenlls lll grrl tili)re a"irr:noio*'rdrcr* it u'as e fieap at f it"st' atld cheap*rt'i.icrc it rvits ltrcll"*

cxpensili:. (A slmiliil ploce ss 0ictjls iot' :l'heat') -l'ha

tL.uclencri*s coliiittt-lc rrntil llte lrvo tlalit'rlllli rt:lative prices bcctltne one n'orld

eriLiilil:r.ir:rn rr:lativi: ;;rice . l\orrnal tlade on atr ongoing basis n'lll ire conclrtcted ;rt this

e tlrriliirr itrrit t'cirttir c pt'icc, !vhar u,ili rhe cquilibr"ium internatronal price bi:'i lVc cair,llot.

-.rt 1:.l::::1.:

ti::ltlll:

ktio,,rirtr-t lluu -ti.()ili.lr, llle ttru r'(riilllJiis rjttriatttl t'lttll trj iitt'!rttt I'l'(l(ltl('t5 \\r'11(-

1,;nou,s0rlr,--lhing -tlle eeluililr|iunl iittertiatiotrai pricc rllio tttList f:l1 rvithitt tilc ral:gil

oltirc trvo ilriee-i'atios thal preiaiietl in ,,:ltch cotllltfv bei'tIr'e trade bcgan:

2.1) l'l:/{: = lnir}rtlatiorral price oicloth * i}'*f i"i('

r ir. ('rllr ir';tieni lv"

6.5 lliit/ s lrterttational pr"ic* olrf it''jat:i l'5 ('il't'

Why'l {- onsiclct H,lut rvolLltJ liappcn if this weie /?{ri ffue ' Fctl' ittstlttcc' r--r:t-tsitler an

irrtelnatiolal pricc gf onlY {)'4 ,l'/t- At ti.ris lor'v prir:'-: t'r1- clotlr' thc rest of ihe r"'6i"iii

rvould $,art to i,rrtrr,rrt clc*li aniie.\port lvlicai because the price of cloih ott the iittei'-

nltioual inarkct is notv irclou, the trOS{ tlf pt'ocltlcillg clotll ai ltonic i0 6? I'li'{' )' rr'o rlt'ai

ccillel 'hc uiacie, tf.,oLr'i,. Ai tiris lorv clotir price thc Uni{ed Slates ivoiilii

a1s0 \lralil t0

iutport c1.th iitrci **1iur, *,h*nt. N* elf ililx"i'nt ls possilll::' t:lld tire cictl pric'; rv*Ltld

bc pirshr:r.i ilp as a tcsr.rlt oi'Ilie er.cess ciellanei ibr eltth. {Simil:rr t'eas0tliug applies ttr

slri;w tii* lack o1.an eqLrilibliLttrl iltile cioth p|ice is abovc 2 t''i{"}-lhc onl1'r';aY lcr

the irvr-l sides to ogr"" u,', t|arlitt;1 is lo lial'e tlte clotlt pt'ice sontewhcle in tlte ratlgc

{).(r7 ir' )0 li;t '

i:{.JiopfiIi) ilni<--n iirwl;ich,rli collirlLir;ic;;iior1, 1:r1!rilii;ig iite rieii"rr-ty rrf r-ortlpicii:cl rv';1ir' i'i;;t'

.r.; i{irit.;:lV fl r'':"i:tr)tl"t '

*

ffi

52 lnternational Economics - Vol. i

Per't Orre J h,' l-h''r,r', i,1 ittiirrl,ilirri;,ri T't',rri,

Supposc llrat tirc slrenglhs o1'cicrtlrncl fbr the pioilllcts. \r'llich w* 11ili f,xalllillc inclre closelv in ti.rer uc-xl L-hapter. k:ld tc au cqLiilihrltiln lnictnatioltal cloll.t price iili1l has the convrnient viliue ol tr I,I''l{'.1-h*n i-.oth c{lunlries tain il"r.tttr itttclltrlir;tla1 tlade. Ilie lJnitccl States gains,

It pinelrrci:s ll ittiit ol".r4tr:iti bv eivirtg t4t ttlll'U..5 Lrtlii of cilllt. It clrn cxpcrt tilis u'lteal tinit iitttt rccdi\ir i irnil clciotlt. I'irc lr-'si t.rl the rrot"ld glins:

It pri:cirLc,:s a Ltitit ol cicth l.r3'gir,'ing Ltil ott15"0.i;7 Liiiit o1'nhei:i.

it cln expolt lhis cloth uitit anrlr*ecivc I unit rtf ivheilt.

ilOx'clo absolrrte ariviurl.age ald conrirarali!r'il(l\iiniagr'tti;tlr io ,:aClt Oti:i:r',''l'ltcie igr 1wo t,lnris to thc ansg,er. !'ilsi. Sniitlrls exariple ol'c:iclt cottlttl'-v ha-iing ltn absolute arlveliage jtr rtrt* prorluct is also li case olcotr:pat':rli\rr'ad\r:lilltlgr'. (Jur rjetailed anll\'- sis oi'cotnparittive:xivalttage coLrld be appli*d to tl:e nitlttelical er*ltll:le olabs*lLtte acivanttge i* tlti: prer,ious se:clirtn.

(r'coii.1. r'trrttyilirirlir,,tilrtttllt!:.: ts tltrli,':,i'rlcrll;tlttl p0u.'ilitl. \\'iilli ,rlillli'r'\ i\ tll;i1 tire {rvg cointrics have ilif i}rell i:t'tce lati{rs il'titrt'c is ;to tt'lttli, ,\ *cttlttt"v *'i11 liave a coritpalirlir;c irrit'antirgr- even if it lias nt absolrite ldvltntage. I'lirr basis ltx tl'*dLr;rnd tlie gaips ii'orn tlarie arise li'r-.nr riillrleuccs be1n,e*tt the crttttltrii:s itt op1:ol'lLtiiitv costs 01' tl:e gLlc;cls. ln oul irrxnelical example oi'cottrpaLltivc advarl'1age ^ lhe olip':r"titnilrr ctlst

cla urrit i-rfwlieiit *'ithin the United Statcs {0.5 a/1,,') is lorv*l't}rllLl this i:irpot"ttltiill' cost ili the t'est of'tlte lvollil (i.5 C/it'i' Tlre llrrittr{l Sta,}lLrs u'ii1 *xpoit t'hE:ai' evr:tt tirgrrg[ ii lras an ebsolLltc rlisailvartfafe in proilucitrg bo',lt:r:he:tl anil c1oth.

Sii is c,rnr1-,iiriiiive arhar:iage svsl'1r1|iino') Nol exactly. \\hilc abstllLtte aiivairlas* {iocs lhrt Ceteinrine the tracle J'}iittL-til in cases lik. tliis. it is a kc;'to i1i1}'i:rr:nr:es ill lir'- ing iitanilat{,ls. llaviug an aLrsolute rlisadvantage in ail prorltlcts llleallii llrat thc c{lillltlY

isless lrt'oiluctivt: thnll ctltet" {:o}-llltries ntt 111v-prorluctirritv r:crttttries }tavc icw reai wages rinel are poor ccitrrtlies" High-protLteliritv corrrttlits harc lriglr l*ill l\'i1ucs and tre rich coi;ntrie5.

'Qee the box litleci ";\bsolute Adi'airiitgrr l)ocs Maiie-r.^'

Iticardo's lrrrncrical illgsh'ation sltccfeded in pt'ttvillg lhc prirlcipli: ol'cot:iiliit'iiliVe aclr,aptug*. \trri: ci,rn atso shori,Ricarclo"s cotttptralive aiivanirgt: ilsing iliagt'afirs incli-

cliting $'hat ca{:h L-otllltlv call producLr ltt:d cotrsttttle. Itilure 3.1 1;ictui'es plodriciion. ccn:uilpfi*t;. artcl trarie l-ur the United St:ltes atlri

the r.el;t of ihe wi:rlc1, Let's exarrrine natioual pi'oilLtctioit tlrst. Each eurlllil)/ cilri tisf !ts

resources ilabor) to ploclLrcc varioLrs antourltij of ilte ttvtt prodLtcts. r;r'heat allal cloth. lt)

sireg.u..lii.rl a rrirtion is capable of'protiiti:irtu t't:qrt;res ir. cltr\io 1r;l'lirte )tltitt shriri's iilJ cl

tlrr:se pcssihilities. For *arlprle. clrrsj,.iiri^ihrtt lltc LJrTiicclStates has l0i] billion hottrs ui, lalrur ayaila'nie during the vear. tnrl tlial llbor procltlctil'ities al{:] as sltc$'tt itl ihc lltcarciian ruurcric*1 eraurple i0.5 u'irclt Lniit per liottr ilttti 0.2-i cloth Llllit pct'ittit.tt'). 'fhen, tlic 1.-inilerl States c:it.r tllrkt: ,,i{i hrliion u'it,:at rittits ilel'\cllr ilit 1;toel'.ic*s Lrniy'