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

Chapter Fifteen: Issues in International Economics 366 steel. But looking at the flip side is even more important—who has the comparative advantage at producing corn? To produce a million bushels of corn, the U.S. would have to give up 500,000 tons of steel. In contrast, Haiti would only have to give up 200,000 tons of steel to produce that same one million bushels of corn. Haiti has a lower opportunity cost to produce corn than does the U.S.; therefore, Haiti has a comparative advantage at producing corn. So let’s now see how this works at a national level, by continuing our Haiti and the U.S. trade example with corn and steel. As seen in Figure 15.1 , the U.S. might hypothetically use its resources to produce a mixture of corn and steel on its PPF, which will allow the U.S. to produce and consume 50 million tons of steel along with 100 million bushels of corn. Likewise, Haiti is able to produce and consume seven million tons of steel along with 15 million bushels of corn. Each is producing along their PPF under autarky, or without trade, and they are both self-sufficient. But just because they are self-sufficient, can they do better with cooperative behavior by trade? The answer, of course, is yes—due to differences in comparative advantage. If the two countries engage in trade, and each produces according to their comparative advantage, there will be more total corn and steel produced, and therefore both nations will be better off. You can compare the results of autarky ( Table 15.2 ) with mutually beneficial trade ( Table 15.3 ) to see the clear advantage of trade. Sharp students may have already picked up on the one exception to trade being mutually beneficial. Can you think what it is? Hint: we see trade as mutually beneficial when Figure 15.1, Haiti/United States Production Possibilities Frontier (PPF). The United States is able to devote all its resources in this example to producing steel and will produce 100 Mtons, or all to corn, and it can produce 100 Mbu, or some linear combination thereof (actual PPFs are bowed outward, but a linear PPF makes the analysis less complex without negating the result). Haiti’s PPF is much smaller, and the U.S. has an absolute advantage in producing both corn and steel. Corn (Mbu) Steel (Mtons) 10 50 100 150 50 100 200 Haiti U.S. Country Steel (Mil Tons) Corn (Mil Tons) U.S. 50 100 Haiti 7 15 Total 57 115 Table 15.2, Autarky Country Steel (Mil Tons) Corn (Mil Tons) U.S. 50 107 Haiti 7 29 Total 57 136 Table 15.3, Cooperative Trade