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

Chapter Fifteen: Issues in International Economics 368 As this table shows, Taiwan can produce more units of food and more units of iPads per worker than the U.S. So can we benefit from trade? If they’re better than we are, won’t engaging in trade with them cost us jobs and more and more of our production will end up in Taiwan? Well, as you learned in chapter 2 and already stated here, yes we can benefit, and no, it won’t cost us jobs on net. It may cost us jobs in industries where we don’t have the lowest opportunity cost of production, but we will gain jobs in industries where we are the lowest opportunity cost producer. So the composition of jobs will change with trade (as each nation specializes in what they do best), but not the overall number; in fact, total jobs will likely go up with trade. Let’s demonstrate this by calculating the opportunity cost of production. We see that the U.S. can produce either three units of food or two iPads per worker. Remembering that the opportunity cost of production is the alternative forgone, we know that the cost of producing one unit of food is 2/3 of an iPad. Alternatively, we could say that the opportunity cost of an iPad is 1.5 units of food. Taiwan likewise can produce either four units of food, or six iPads per worker. So the opportunity cost of a unit of food is 1.5 iPads, or alternatively, the opportunity cost of an iPad is .67 units of food. Looking at these production possibilities, we can see that although Taiwan has an absolute advantage in the production of both food and iPads, the U.S. has a comparative advantage in the production of one of the goods. Can you tell which one? Hint: we have a comparative advantage in the production of the good which has the lowest opportunity cost of production. Let’s think about food first. For us to produce an additional unit of food (by moving one worker over from producing iPads to producing food), we would have to give up .67 of an iPad. For Taiwan, however, they would have to give up 1.5 iPads to produce an additional unit of food. Because our opportunity cost is much less to produce an additional unit of food (.67i vs. 1.5i for Taiwan), we have a comparative advantage in the production of food. Now let’s look at iPads. (Note: you don’t really need to do this step, nor calculate the opportunity cost of iPads once you’ve done it for food. Once you see that the U.S. has the comparative advantage in food, Taiwan must have the comparative advantage in the production of the other good—in this case, iPads). If the U.S. wants to produce an additional iPad, we would have to give up 1.5 units of food, while Taiwan would only have to give up .67 units of food. Observant readers will note that the opportunity 1F = .67i 1F = 1.5i 1i = 1.5F 1i = .67F Op Cost: food Op Cost: iPad U.S. (3F/2i) Taiwan (4F/6i)