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21-6 International Trade [CH 21

silver, and made the US currency a fiat currency, a currency no longer supported or
linked to silver. Prior to 1967 the currency of the United States was either Silver
Certificates or Federal Reserve Notes. Today, the currency is only Federal Reserve

Notes. Prior to 1967 the coinage of the US was silver dimes, quarters, half-dollars
and dollars. Today, this coinage is an amalgamation of Copper, Zinc, and Cupro-
dross: something regarded Nickel, all base metals, or as in ancient times dross.
as worthless; rubbish:
Specialization among Nations

Nations usually benefit if they specialize in certain products or commercial
activities. By doing what they do best, they are able to exchange surplus domestic
products for foreign-made goods that are needed. This allows a higher standard of

living than would be possible if the country tried to produce everything itself. For
example, Colombia, South America, has a fertile soil and a favorable climate that
enables it to specialize as a producer of coffee, the nation's leading export.
Colombian coffee is promoted in the United States, which imports 99.9 percent of

its coffee.
Specialization also has its dangers if taken too far. Less-developed countries
depend on one or two primary commodities, such as grain and copper to earn
foreign currency to pay for imported goods. If the price of the primary good(s)

declines, it becomes more difficult to import needed goods and services. Other
problems can occur when a country depends on foreign nations for materials critical
to its national defense. For example, the United States currently purchases all its
high-grade silicon for missile guidance systems from a West German plant just 30

miles from the Czech Republic. This source would be highly vulnerable during a
European war, when obtaining the silicon would be difficult if not impossible. This
is a strategic consideration.

Absolute Advantage

absolute advantage A country has an absolute advantage in the marketing of a product if it has a
Situation in which a country monopolistic position or it produces the good at the lowest cost. Examples of an
has a monopolistic position in absolute advantage are rare because few countries are sole suppliers and because
the marketing of a good or rapidly changing economic conditions can wipe out advantages in production costs.
produces it at the lowest cost.
Consider the case of Honda. As the dollar declined in value against the yen,
Honda's production costs in Marysville, Ohio, went down. In fact, some coupe
versions of the Accord now use an engine made in Wako, Japan, but the model is
assembled in Marysville, then loaded on a ship in Portland, Oregon, and sent to

Japan for sale. While other factors played a role in Honda's decisions, this example
suggests absolute advantage is becoming an impractical concept in a modern
economy.

Comparative Advantage

comparative advantage A country has a comparative advantage in an item if it can supply that item
A country's ability to supply a more efficiently and at a lower cost than it can supply other goods, compared to
particular item more efficiently other nations. For example, if country A can produce a certain good three times as
and at a lower cost than it can
supply other products. efficiently as country B, and it produces a second good only twice as efficiently as
country B does, then country A has a comparative advantage in the first good.
Country B, even though it produces the second good less efficiently than country A,
has a comparative advantage in this item because that is the good it is more

relatively efficient at producing. The greatest supply of both goods will occur when
each country specializes in producing the good where it has a comparative
advantage; country A producing the first good and country B producing the second
good.

Countries do tend to follow this pattern of specialization. For example,
American exports tend to be in those goods in which the United States has a
comparative advantage over its trading partners. Being a highly industrialized

country with good natural and agricultural resources, the United States tends to
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