Absolute Advantage and Rice Trade Dynamics

Absolute Advantage in the Rice Market

Absolute Advantage: Rice is produced in both Vietnam and Japan. Assume demand conditions are exactly the same in both countries. This implies demand curves for rice in the two countries are exactly the same.

Trade often arises due to differences in supply conditions. Assume the supply curve for Vietnam is farther to the right than the supply curve for Japan. At every price, Vietnam supplies more rice than Japan. Perhaps Vietnam uses superior technology or production inputs are lower in Vietnam.

Figure 1: Demand and Supply in the Rice Market

Autarky Rice

• Since no trade is involved between Vietnam and Japan, these two prices are known in international economics as autarky prices.
• Autarky is a situation in which a country has no economic relationships with other countries.
• Figure 1 depicts a situation in which the autarky price of rice is lower in Vietnam than in Japan: Vietnam has an absolute advantage in the production of rice vis-à-vis Japan.

Absolute advantage implies a potential pattern of trade. If the two countries forgo autarky and begin to trade, the world price of rice will lie somewhere between the two autarky prices, or PV < PW < PJ.

Figure 2.6: Gains from Trade in the Rice Market

A Schematic View of Absolute Advantage

What ensures that the amount exported by Vietnam is the same as the amount imported by Japan? If EV were smaller than ZJ, there would be excess demand or a shortage in the world market for rice. Excess demand causes the price to rise. As PW rose, exports of Vietnam would expand and imports of Japan would contract until excess demand in the world market disappeared. Similarly, if EV were larger than ZJ, PW would fall to bring the world market back into equilibrium.

Differences in supply conditions among countries give rise to complementary patterns of absolute advantage. These patterns of absolute advantage make possible complementary patterns of international trade.

Gains from Trade in Vietnam

When Vietnam moved from autarky to exporting in the rice market, producers experienced both an increase in price and an increase in quantity supplied along the supply curve. This should be good for producers: Producers have gained area A+B.

Figure 2 shows an increase in producer surplus of area A+B as a result of the movement from autarky to trade. Consumers experience an increase in price and a decrease in quantity demanded along the demand curve. This should harm consumers: Consumers have lost area A.

Figure 2 shows a decrease in consumer surplus of area A. What do these effects mean for Vietnam?