Specialization Shift resources to export industry Achieve higher overall output and income Absolute advantage –Higher output per worker for a good Comparative advantage –Lower domestic opportunity cost for a good 5-1

Comparative Advantage ProductABCDE Avocados Soybeans **Optimal domestic production occurs at point C Sacrifice 5 tons soybeans for 20 tons avocados Costs 1 ton soybeans to produce 4 tons avocados Mexico’s Production Possibilities Table (in Tons) Production Alternatives 5-2

Comparative Advantage Avocados Soybeans **Optimal domestic production occurs at point C Absolute advantage in both goods Sacrifice 10 tons soybeans for 30 tons avocados Costs 1 ton soybeans to produce 3 tons avocados ProductABCDE U.S.’s Production Possibilities Table (in Tons) Production Alternatives 5-3

Comparative Advantage Mexico will produce avocados U.S. will produce soybeans U.S. gives up 3 A for 1 S Mexico gains 4 A for 1 S Terms of trade –3.5 A for 1 S –Both countries benefit 5-4

Comparative Advantage Gains from trade Mexico starts at C (24 A and 9S) –Move to E (60 A and 0 S) –Trade 35 A for 10 S U.S. starts at T (33 A and 19 S) –Move to R (0 A and 30 S) –Trade 10 S for 35 A Overall gains? 5-5

Comparative Advantage (pg. 98) Terms of Trade – 1s : 3.5a Trade: 10 tons soybeans for 35 tons avocados