Global issues and events influence economic activities.
9. When regions and nations use comparative advantage to produce at the lowest cost and then trade with others, production, consumption and interdependence increase.
Comparative advantage of regions and nations exists when they can produce goods or services at a lower opportunity cost than other individuals or nations. Specializing in the production of the good or service at a lower cost increases trade with others.
For example, Country X can produce either 400,000 tons of corn or 800,000 tons of wheat. The opportunity cost for Country X of producing one ton of corn is two tons of wheat. Country Y can produce either 100,000 tons of corn or 500,000 tons of wheat. The opportunity cost for Country Y producing one ton of corn is five tons of wheat.
Of the two countries, Country X is the lower-cost producer of corn because for each ton of corn produced, it only has to give up the production of two tons of wheat, whereas Country Y has to give up the production of five tons of wheat.
In the same manner, Country Y has a comparative advantage in producing wheat because for each ton of wheat produced, it only gives up 1/5 ton of corn. County X gives up 1/2 ton of corn for each ton of wheat produced.
Instead of each country trying to produce both corn and wheat at less than the highest production levels, it makes sense for Country X to specialize in producing corn and for Country Y to specialize in producing wheat.
Each country can maximize production in one product and trade with each other for what they no longer produce. Country X can now trade one ton of corn for three tons of wheat (without specialization, the opportunity cost of producing one ton of corn was two tons of wheat). Country Y can now trade three tons of wheat for one ton of corn (without specialization, the opportunity cost of producing three tons of wheat was 3/5 ton of corn).
Trade works to the benefit of both countries and consumption of these products can increase.
Expectations for Learning
Explain how production, consumption and interdependence increase when regions and nations trade with each other as a result of using comparative advantage.