Question

In a Ricardian two-good, two-country framework, draw a diagram to show how a country can have comparative advantage in one product but have no absolute advantage in any product.

Answer 1

Consider a situation where the United States and Mexico each have 20 workers. For example, as Table 1 shows, if the United States divides its labor so that 20 workers are making shoes, then, since it takes 2 workers in the United States to make 500 shoes, a total of 5000 shoes will be produced. If the 20 workers in the United States are making refrigerators, and each worker can produce 500 refrigerators, then a total of 20,000 refrigerators will be produced.

Let’s say that, in the situation before trade, each nation prefers to produce a combination of shoes and refrigerators that is shown at point A. Table 1 shows the output of each good for each country and the total output for the two countries.

In the case below Mexico has absolute disadvantage in both the products shoes and refrigerators but comparative advantage in Shoe Productio

Country	Current Shoe Production	Current Refrigerator Production
United States	5,000	20,000
Mexico	4,000	5,000
Total	9,000	25,000
Table 1. Total Production at Point A before Trade

Continuing with this scenario, each country transfers some amount of labor toward its area of comparative advantage. For example, the United States transfers six workers away from shoes and toward producing refrigerators. As a result, U.S. production of shoes decreases by 1,500 units (6/4 × 1,000), while its production of refrigerators increases by 6,000 (that is, 6/1 × 1,000). Mexico also moves production toward its area of comparative advantage, transferring 10 workers away from refrigerators and toward production of shoes. As a result, production of refrigerators in Mexico falls by 2,500 (10/4 × 1,000), but production of shoes increases by 2,000 pairs (10/5 × 1,000). Notice that when both countries shift production toward each of their comparative advantages (what they are relatively better at), their combined production of both goods rises, as shown in Table 2. The reduction of shoe production by 1,500 pairs in the United States is more than offset by the gain of 2,000 pairs of shoes in Mexico, while the reduction of 2,500 refrigerators in Mexico is more than offset by the additional 6,000 refrigerators produced in the United States.

Country	Shoe Production	Refrigerator Production
United States	3,500	26,000
Mexico	6,000	2,500
Total	9,500	28,500
Table 2. Shifting Production Toward Comparative Advantage Raises Total Output

This numerical example illustrates the case of comparative advantage: even when one country (US) has an absolute advantage in all goods and another country (Mexico) has an absolute disadvantage in all goods, both countries can still benefit from trade. Even though the United States has an absolute advantage in producing both refrigerators and shoes, it makes economic sense for it to specialize in the good for which it has a comparative advantage. The United States will export refrigerators and in return import shoes.

Before and After Trade (a) With 20 workers, the United States can produce either 5000 shoes and zero refrigerators or 20,000 refrigerators and zero shoes. (b) With 20 workers, Mexico can produce a maximum of 4,000 shoes and zero refrigerators, or 5,000 refrigerators and zero shoes. All other points on the production possibility line are possible combinations of the two goods that can be produced given current resources. Blue Line is where the countries start producing and consuming before trade. Green Line is where they end up after trade.