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

Chapter Fifteen: Issues in International Economics 367 the parties concentrate production where they have a comparative advantage . We said earlier that everyone has a comparative advantage at producing something—an empirical (real world data) but not a theoretical reality. It is conceptually possible that individuals and nations could be equally efficient in producing all goods. If everyone were truly equal, there would be no benefit to trade. It is precisely our differences that make trade and mutual cooperation so profitable . Inequality, therefore, is not something to necessarily lament—as it opens the door to mutual cooperation and forces us to work beyond our differences for society’s overall benefit. Consider Taiwan and the U.S. Let’s assume the choice is between food and iPads, and assume the following production possibilities: 3 4 2 6 Food U.S. Taiwan Ipads Units of Output per Worker IN THE WEEDS WITH THE PPF! This calculation is beyond the scope of our initial review, but the numbers above can be found as follows. First, the U.S. under autarky could produce anywhere on its PPF such as at 50S and 100C, since it faces a 2:1 tradeoff and could produce either 100S or 200C. Likewise, Haiti could produce either 10S or 50C, so it could produce three less steel units than possible (10-3=7) and at a 5:1 trade ratio gain, 3X5=15 units of corn to go with its 7 units of steel. The U.S. and Haiti could trade at any ratio between 2:1 and 5:1 and both countries would profit. Assume they trade at 3:1, and let Haiti concentrate on producing corn, its comparative advantage, and trade for its desired 7 units of steel. By producing only corn, they produce 50 units. Since they want 7 units of steel, and must trade at 3:1, they have to give up 21 units of corn, leaving them 29 units. Note: with the same consumption of steel (7 units), they can consume 14 more units of corn. For the U.S., to generate 7 units of steel to trade with Haiti, we must give up 14 units of corn (2:1 trade ratio) or move left on our PPF to 57S and 86C. Then trading the extra seven units of steel to Haiti at a 3:1 ratio, we gain an additional 21 units of corn, for a new consumption total of 50 units of steel and 107 units of corn. Like Haiti, we get the same amount of one good (steel in the U.S. case) but are able to consume more corn with trade. Both nations are better off with trade even though the U.S. has an absolute advantage in producing corn and steel. Inequality, therefore, is not something to necessarily lament—as it opens the door to mutual cooperation and forces us to work beyond our differences for society’s overall benefit.