Comparative Advantage
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Comparative Advantage

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Shows how to figure absolute and comparative advantage

Shows how to figure absolute and comparative advantage

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Comparative Advantage Comparative Advantage Presentation Transcript

  • Absolute Advantage and Comparative Advantage
  • Comparative Advantage – can produce a product at a "lower opportunity cost". Absolute Advantage[outputs] – can produce absolutely more with the same inputs. Absolute Advantage[inputs] – can produce absolutely faster with the same inputs.
  • Absolute Advantage – [outputs] can produce absolutely more with the same inputs [more efficient]. Absolute Advantage – [inputs] can produce absolutely faster with the same inputs [more efficient]. I Can do 8 push-ups . I Can do 42 push-ups. I have an absolute advantage in the production of push-ups. I can clean that house in 4 hours. I’m more efficient. I can do the same work in 3 hours so I have an absolute advantage . T exas L onghorn T exas Aggie F uture L onghorn Maid F uture Aggie Maid
  • PPC – before trade & specialization– prisoners of their own PPC’s and CPC’s C O F F E E Bread 80 20 PPC CPC Before trade, I’m a prisoner of my own PPC. Haiti 40 [Consumption Possibilities Curve] 10 0 Haiti’s D omestic C omparative C ost 1 Bread = 4 Coffees ¼ Bread = 1 Coffee
  • Comparative and Absolute Advantage [ C omparative A dvantage can produce at a lower productive opportunity cost ] Haiti’s DCC Cuba’s DCC 1B = __ C 1B = __ C __ B = 1C __ B = 1C 4 6 1/4 1/6 100 18 “ D o what you do best & trade for the rest.” Absolute Advantage - more efficient, can produce more with the same number of inputs [who can do the most in absolute numbers] “ Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price . 1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an absolute advantage in bread . 2. Haiti will export (bread/coffee) [ comparative advantage ] and import (bread/coffee). [ comparative disadvantage ] & Cuba will export (bread/coffee) & import (bread/coffee). 3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged for (3/5/7) tons of coffee . Production in both is subject to (increasing/constant) opportunity costs. “ Trade is the free lunch of economics.” Terms of Trade 1 bread = __ coffees World CC 1 Bread =__ Coffees __ Bread=1 Coffee 5 5 1 / 5 80 o 20 90 0 15 Haiti Cuba “ A prisoner of my own PPC.” Bread Bread Coffee Coffee “ I can consume only on my PPC.”
  • Trade Allows Nations to Consume Beyond Their PPCs While Producing On It 10 breads & 50 coffees 12 breads & 40 coffees 50 10 20 We are suspending reality. CPC (after trade) CPC (before trade) PPC (before & after trade) 100 80 40 Coffee 0 11 breads and 45 coffees 10 breads and 40 coffees Bread “ Now with trade, you can escape your PPC and consume more of both bread and coffee.” 45 “ I’m outa here.”
  • Brazil’s DCC Chile’s DCC 1 W = __ S 1 W = __ S ___W = 1S ___W = 1S 4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel). 5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel. The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat. 6. If the 2 countries trade, Chile would export (wheat/steel) & import (wheat/steel). If the 2 countries traded, Brazil would export (wheat/steel) & import (wheat/steel). 4 2 ¼ ½ 30 4 Terms of Trade 1 W heat = ___ Steels 3 World CC 1 Wheat = __ Steels __ Wheat = 1 Steel 1 / 3 3 12 0 3 20 0 10 Brazil Chile Steel Steel Wheat Wheat Comparative Advantage 2
  • DCC for U.S. DCC for Brazil 1 H = __ B 1 H = __ B ___H = 1B ___ H = 1B 8. Brazil has a comparative advantage in (bread/ham) and a comparative disadvantage in (bread/ham). 9. The opportunity cost of producing 1 unit of ham for the U.S. is (10/12/14) breads. 10. A cceptable terms of trade might be 1 ham for (8/12/16) breads. 14 1/14 1/10 70 0 5 40 4 0 Ham Ham Bread Bread Terms of Trade 1 Ham = __ Bread 10 12 Brazil Comparative Advantage 3
  • Froggy A B C D E DCC: Froggy Woggy A B C D E DCC: Woggy Pork (tons) 4 3 2 1 0 1P = __ B Pork (tons) 8 6 4 2 0 1P = __ B Beans (tons) 0 5 10 15 20 __ P = 1B Beans (tons) 0 6 12 18 24 __ P = 1B Terms of Trade 1 Pork = __ Beans 15. Production in both countries is subject to (increasing/constant) opportunity cost . 16. If these 2 nations specialize in accordance with comparative advantage , Froggy will produce (pork/beans) & Woggy will produce (pork/beans). 17. In Froggy , the opportunity cost of 1 pork is (1/5 or 5 or 3) beans’ 18. Assume that prior to specialization & trade , Froggy produced combo “C” and Woggy produced “B” . If these 2 nations now specialize according to comparative advantage , the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork. 19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans . 5 1/5 3 1/3 4 Comparative Advantage 5
  • 24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts). Woggy will export (soup/peanuts) and import (soup/peanuts). 25. For Doggy , the opportunity cost of 1 soup is (1/2/3) peanuts. For Woggy , the opportunity cost of 1 soup is (1/2/3) peanuts. 26. Prior to specialization, Doggy & Woggy chose combination “C” . Now each specializes according to comparative advantage . The gains from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts . Doggy A B C D E DCC: Doggy Woggy A B C D E DCC: Woggy Soup 60 45 30 15 0 1S = __ P Soup 20 15 10 5 0 1S = __ P P eanuts 0 15 30 45 60 Pea nuts 0 15 30 45 60 __ S = 1P 1 3 1/3 60 60 Terms of Trade 1 Soup = __ Peanuts 2 Comparative Advantage 7
  • Fuzzy A B C D E F DCC: Fuzzy Wuzzy A B C D E F DCC : Wuzzy Plums 1500 1200 900 600 300 0 1G = __ P Plums 3500 2500 1500 1000 500 0 1G = __ P Grapes 0 100 200 300 400 500 __ G = 1P Grapes 0 150 300 450 575 700 __ G = 1P Terms of Trade 1 Grape = __ Plums 1/3 5 1/5 11. In Wuzzy , the opportunity cost of 1 grape is (1/2/3/4/5) plums. 12. Fuzzy has a comparative advantage in & should produce (plums/grapes). 13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums. 14. Assume that if Fuzzy did not specialize it would produce combo “ C ” and if Wuzzy did not specialize it would produce combo “ B ” . The gains from specialization and trade are: (0/100/150) plums and (0/100/150) grapes. 15. Mutual terms of trade between Fuzzy and Wuzzy would be 1 grape for (2/4/6/8) plum. 4 3 The countries of: “ F uzz y” and “W uzz y” Comparative Advantage 4
  • [lower # of hours gives absolute advantage] Djibouti DCC : Djibouti Canada DCC : Canada Fish 10 hours 1W =__F Fish 20 hours 1 W = __ F Wheat 20 hours ___ W=1F W hea t 60 hours ___W = 1F Terms of Trade: 1 Wheat = __ Fish 2 1/2 3 1/3 2 . 5 27. (Djibouti/Canada) has an absolute advantage in both commodities. (Djibouti/Canada) has a comparative advantage in producing wheat . 28. (Djibouti/Canada) has an absolute disadvantage in both , but a comparative advantage in fish . 29. Advantageous trade can occur between the two when 1 wheat is exchanged for (1/2.5/3) fish. We are going to turn inputs into outputs . In 20 hours , Djibouti can produce an output of 1 wheat or 2 fish . In 60 hours , Canada can produce an output of 1 wheat or 3 fish . Looking at inputs [hours] Comparative Advantage 8 [Inputs]
  • Is There A Djibouti?
  • The Djibouti Booti Note
  • [lower # of hours gives absolute advantage] DCC: U.S. Russia DCC: R ussia Caviar 6 hours 1C = __W Caviar 16 hours 1C = __ W Wheat 3 hours __ C =1W Wheat 4 hours __ C = 1W 30. (Russia/U.S.) has an absolute disadvantage in both commodities . (Russia/U.S.) has a comparative advantage in wheat . 31. (Russia/U.S) has an absolute advantage in both commodities . (Russia/U.S.) has a comparative advantage in caviar . 31. Advantageous trade can occur between the two nations when 1 caviar is exchanged for (1/3/5) tons of wheat . 2 1/2 4 1/4 Terms of Trade 1 Caviar = __ Wheats 3 We are once again turning inputs into outputs . In 6 hours , the U.S.A. can produce an output of 1 caviar or 2 wheats . In 16 hours , R ussia can produce an output of 1 caviar or 4 wheats . Comparative Advantage 9 [Inputs]
  • Absolute Advantage [ Outputs v. Inputs ] Remember that with outputs or quantity , the larger number indicates absolute advantage ; that country can produce absolutely more with the same inputs, and is more efficient . And with inputs ( hours ), the smaller number indicates absolute advantage ; that country is more efficient because it can produce a good absolutely faster than the other with the same inputs. Product Market Resource Market
  • 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct]
    • Country Food Clothing
    • Ducky 20 hours 50 hours
    • Wucky 10 hours 20 hours
    • a. Ducky has a comparative advantage in the production
    • of both food and clothing.
    • b. Wucky has a comparative advantage in the production
    • of both food and clothing.
    • c. Ducky has a comparative advantage in food production, &
    • W ucky has a comparative advantage in clothing production .
    • d. Ducky has a comparative advantage in clothing production,
    • & Wucky has a comparative advantage in food production .
    • Neither country has a comparative advantage in the
    • production of either good.
    Country Food Clothing Ducky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F Terms of Trade might be 1C = 2.2F Ducky Wucky
  • Product Market [outputs] Country Guns Butter Rabbit 20 units 60 units Wabbit 10 units 20 units Resource Market [inputs] Country Guns Butter Rabbit 20 hours 60 hours Wabbit 10 hours 20 hours W hat country has an absolute advantage in guns ? W hat country has an absolute advantage in guns ? Rabbit Wabbit Why does Rabbit have an absolute advantage in guns ? Why does Wabbit have an absolute advantage in guns ? Rabbit can produce absolutely more guns than Wabbit [ 20 units v. 10 units ] Wabbit can produce guns absolutely faster than Rabbit [ 10 hours v. 20 hours ] Rabbit W hat country has a comparative advantage in guns ? W hat country has a comparative advantage in guns ? Wabbit Rabbit Wabbit can produce guns at a lower opportunity cost [ 2 butters v. 3 butters ] Rabbit can produce guns at a lower opportunity cost [ 1/3 butter v. 1/2 butter ] Rabbit 1 G = 3 B 1/3 G=1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1/3 B=1G Wabbit 1 B = 2 G 1/2 B=1G Wabbit Rabbit Wabbit “ Let’s change inputs into outputs.”
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