Discussion Questions for “The Frugal Inventor” 1. Describe why tourists across the world go to Bangalore. 2. In what ways is India’s Healthcare system cheaper and smarter; can they shift their PPF? 3. What can the U.S. learn from “the frugal innovator”?
How can we produce outside our PPFS? Specialization and Comparative Advantage
Trade and Specialization Trade allows individuals and countries to reach outside of their PPFs Mutually beneficial Lower cost for obtaining goods and services Specialization: the use of all scarce resources to produce one good or service Improves resource allocation, EFFICIENCY same resources = more output
How do you decide what to specialize in? COMPARATIVE ADVANTAGE= China: OC (a) < Mexico: OC (a) A country has a comparative advantage if their opportunity cost of producing is less than the opportunity cost of their trading partners
The two Advantages When someone produces more of a good in the same amount of time as another When someone can produce a good at a lower opportunity cost in the same amount of time as another Absolute: #s Comparative
Steps to Find Comparative Adv. Total output: 15 snowboards, 45 skis Find the Opportunity Costs of Producing One Unit with a ratio
Terms of Trade What is the best price to allow for a mutually beneficial trade? (Look at the opportunity cost for the goods each country is importing)
Patty wants a cost that is less than her opportunity cost for skis (2)
Tony wants a price that is less than it costs to produce snowboards (2)
Practice Total output: 34 fish, 17 coconuts Who has the absolute advantage in the production of fish? Who has the absolute advantage in the production of coconuts? Who has the comparative advantage in the production of fish? Who has the comparative advantage in the production of coconuts? 3. Explain how each will benefit from trade if each trades 10 units at a price of 1 fish for 1 coconut.
BONUS Who has the absolute advantage in the production of skis? In snowboards? Who has the comparative advantage in the production of snowboards and skis? Who will import skis? What price will allow for mutually beneficial trade?