Using Comparative Advantage to Increase Potential Consumption

As stated previously, this chapter’s purpose is to illustrate that if everyone focuses on their work specializations, then everyone will benefit.

Example: Assume that each of two neighboring countries, Country C and Country D, has 10 residents of working age, and that each produces only the same two items, which are bread and shoes:

  • In Country C, all of the workers are bakers, and are therefore more efficient at bread baking.

  • In Country D, all of the workers are shoemakers, and are therefore more efficient at shoe making.

The PPCs for both countries show that if everyone in the country of bakers (Country C) is employed in baking bread, then Country C will produce 1,000 loaves of bread. If everyone in the country of shoemakers (Country D) is employed in baking bread, then Country D will produce only 500 loaves of bread. On the other hand, if everyone in the country of bakers (Country C) is employed in shoe making, then Country C will produce only half as many shoes as the country of shoemakers (Country D), assuming that everyone in Country D is employed in making shoes.

Each country decided to bake 400 loaves of bread, which is an amount that meets their respective minimum nutritional requirements. As a result:

  • Country C finds itself at point B1 on its PPC curve.
     It produces 400 loaves of bread and 40 pairs of shoes.

  • Country D finds itself at point B2 on its PPC curve.
    It produces 400 loaves of bread and 30 pairs of shoes.

Country C, which has only bakers, also produces shoes, while country D, which has only shoemakers, also bakes bread. The residents of the two countries met one day and were shocked to learn how inefficiently the other country was at making one of the two products. It was decided that from now on, Country C, with only bakers, would make only bread (point A1), while country D, with only shoemakers, would make only shoes (point A2). Under this arrangement, the two countries can manufacture a total of 1,000 loaves of bread and 100 pairs of shoes. This can be split evenly, with each country receiving 500 loaves of bread and 50 pairs of shoes. Each citizen will receive 50 loaves of bread and 5 pairs of shoes. The following table shows that when each country focuses on its specialization, each receives more products.

Conclusion:

Trading between the two countries provides more products (i.e. , benefits) to the residents of both countries.