Example of Gains of Specialization

EXAMPLE OF GAINS OF SPECIALIZATION

SMITH PRODUCTIVITY (=ΔQ/ΔL, Q=output, L=labor)

U.S. MEXICO

CORN 3 bu./hr. 1 bu./hr.

AVOCADOS 1 bu./hr. 2 bu./hr

RICARDO PRODUCTIVITY PRODUCTION BEFORE PRODUCTION AFTER & (=ΔQ/ΔL, Q=output, SPECIALIZATION SPECIALIZATION CURRENT L=labor)

U.S. MEXICO U.S. MEXICO Total U.S. MEXICO TOTAL

CORN 3 bu./hr. 1 bu./hr. 1500 bu. 1100 bu. 2600 3000 0 3000

AVOCADOS 2 bu./hr. 1 bu./hr 1000 bu. 1100 bu. 2100 0 2200 2200

MC 3/2 bu. 1bu. Corn (avocados) Corn

LABOR 1000 Hrs. 2200 Hrs. 500 Hrs. 1100 Hrs. ALL ALL TO TO EACH TO TO AVOCADOS EACH CORN

CONSUMPTION AFTER CONSUMPTION AFTER TRADE

TRADE ( @PA = 1.25C) (@ PA=1.4C) of 1050A for 1312.5C of 1050A FOR 1470C

U.S. MEXICO Total U.S. MEXICO Total

CORN 1687.5 1312.5 3000 1530 1470 3000

AVOCA 1050 1150 2200 1050 1150 2200

NOTE: THE SPECIALIZATION PATTERN WILL OCCUR IF CORN PRICE IS LOWER IN THE US AND HIGHER IN MEXICO (AND REVERSE FOR AVOCADOS) FOR EXAMPLE:

MARKET PRICES (HOME CURRENCY) MARKET PRICES (in U.S $) BEFORE TRADE (P = MC = wΔL/ΔQ, BEFORE TRADE where ΔL/ΔQ = reciprocal of productivity) EXCHANGE RATE = 5 PESOS/$1

US MEXICO US MEXICO

WAGE $10 20 PESOS WAGE $10 $4

PRICE OF $3.33 20 PESOS PRICE OF $3.33 $4 CORN CORN

PRICE OF $5 20 PESOS PRICE OF $5 $4 AVOCADOS AVOCADO S

Note: After trade, prices measured in the same currency will be the same. For example, if the world price of avocados is 1.25 bu. of corn/ bu. of avocados, then, the U.S. price of corn could rise in the U.S. (fall in Mexico) to, e.g., $3.50 and the price of avocados would be 3.50x1.25 = $4.375 (= fall in the US and rise in Mexico).