Although Latvia had an absolute disadvantage in most products relative to EC countries, trade was mutually beneficial because Latvia had a __________ advantage in __________. (Related to Application 1 on page 50.)

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Application 1 ABSOLUTE DISADVANTAGE AND COMPARATIVE ADVANTAGE IN LATVIA APPLYING THE CONCEPTS #1: What is the rationale for specialization and trade? Recall the chapter opener about the nation of Latvia, which in the 1990s was much less productive than nations in the European Community. The question is, Why would a member of the EC, whose workers are more productive than Latvian workers in the production of all goods, buy any products from Latvia? The following table shows worker productivity and the opportunity cost of production for two products, saw timber and grain. Output Opportunity cost EC: Saw Timber 1200 1/6 grain EC: Latvia: Saw Grain 200 6 saw timber Timber 200 1/20 grain Latvia: Grain 10 20 saw timber Although the EC has an absolute advantage in both prod- ucts, it has a comparative advantage (a lower opportunity cost) in grain: the opportunity cost of one unit of grain is six units of saw timber in the EC, compared to 20 units of saw timber in Latvia. Latvia has a comparative advantage in saw timber: the opportunity cost is 1/20 units of grain in Latvia, compared to 1/6 units of grain in the EC. Based on the notion of comparative advantage, we know that both the EC and Latvia can be made better off if the EC produces grain in exchange for saw timber produced by Latvia. The EC specializes in grain because that's the product for which it has the largest productivity advantage: the productivity ratio is 20:1 for grain, compared to only 6:1 for saw timber. Related to Exercise 1.10. SOURCES: (1) Aleksandrs Fedotovs, "A Small Nation's Comparative Advan- tage: The Case of Latvia, Business and Economic Horizons 1 (2010), pp. 51-57. (2) "Forest Industry Faces Challenges," balticexport.com (accessed February 23, 2015).