No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 365 Say the United States only produces two goods, Steel and Corn. The United States could produce either 100 million tons of steel or 200 million bushels of corn (or let’s assume some linear combination thereof). Haiti, however, can only produce 10 million tons of steel or it can produce 50 million bushels of corn. By this fictitious example (notional data), we can see that as a nation, the U.S. has an absolute advantage over Haiti in producing either steel or corn. But we’ve already said that everyone has a comparative advantage at something—so who has the comparative advantage at producing steel and who has the comparative advantage at producing corn ( Table 15.1 ) ? U.S. Haiti Corn (million bushels) 200 50 Steel (million tons) 100 10 Table 15.1, National Output. U.S. has an absolute advantage in both! The answer goes back to the definition of comparative advantage: who has the lowest opportunity cost to produce each? For the U.S., for every ton of steel it costs them two bushels of corn. Do you see why? Since the U.S. can produce either 200 million bushels of corn or 100 million tons of steel: COMPARATIVE ADVANTAGE For the U.S., 100 tons of steel equals 200 bushels of corn, or 1 ton of steel equals 2 bushels of corn. For Haiti, 10 tons of steel equals 50 bushels of corn, or 1 ton of steel equals 5 bushels of corn. So steel is more expensive in opportunity cost terms for Haiti; Haiti has to give up five units of corn for every unit of steel, while the U.S. would only have to give up two units of corn for a unit of steel. Similarly for Haiti, for every ton of steel, it has to give up five bushels of corn. In terms of opportunity cost, steel is relatively more expensive for Haiti than the U.S., as it has to give up more corn to produce steel. So the U.S. has a comparative advantage at producing steel. But we already knew the U.S. had an absolute advantage at producing steel and corn, so maybe it’s not a surprise to see the U.S. has a comparative advantage at producing