ACED 1100 Comparative Advantage Name: _________________________________ \ International trade is based upon the principle that all countries gain from trade. Maximum Production Possibilities for the US and Mexico: US Mexico computers 50 10 TVs 50 40 1 year of labor by one worker in U.S. can either produce 50 computers or 50 TVs 1 year of labor in Mexico can either produce 10 computers or 40 TVs But we need to judge by relative rather than absolute terms! Each country's climate, labor force, and geography make it a relatively efficient producer of some goods and an inefficient producer of others. Numbers above are the total amount that can be produced, but does not tell us the COST at which they are produced! ...meaning opportunity cost... Opportunity Cost of Producing Computers: US: cost of 1 computer = 1 TV Mexico: cost of 1 computer = 4 TVs Opportunity Cost of Producing TVs: US: cost of 1 TV = 1 computer Mexico: cost of 1 TV = 1/4 computer Comparative Advantage: One country has a lower opportunity cost in producing an item. US has comparative advantage in computers (costs less in terms of TVs). Mexico has comparative advantage