Absolute & Comparative Advantage. Absolute Advantage (AA) “the best” -- whoever has the most...

Absolute & Comparative Absolute & Comparative AdvantageAdvantage

Absolute Advantage (AA)Absolute Advantage (AA)

““the best”the best”

-- whoever has the -- whoever has the most outputmost output (when (when input is fixed)input is fixed)

OROR

--whoever has the --whoever has the leastleast input input (when (when output is fixed)output is fixed)

Comparative Advantage (CA)Comparative Advantage (CA)

A person has a comparative advantage at producing something if they can produce it at lower cost than anyone else.

Two methods for calculating Two methods for calculating Opportunity CostOpportunity Cost

Output Method Output Method (used when problem tells you how (used when problem tells you how much each producer makes with much each producer makes with same resources)same resources)

Input MethodInput Method(used when problem tells you how (used when problem tells you how many resources each producer uses many resources each producer uses to make the same amount of product)to make the same amount of product)

WARNING!!WARNING!!

The #1 reason students miss The #1 reason students miss

comparative advantage comparative advantage

questions is confusion regarding questions is confusion regarding

whether the question is an whether the question is an

output or input problem!output or input problem!

Let’s Practice!Let’s Practice!

1. Country1. Country FoodFood ClothingClothingXX 20 hours20 hours 50 hours50 hoursYY 10 hours10 hours 20 hours20 hours

Output or Input problem?Output or Input problem?

INPUTINPUT

2. Country2. CountryWheatWheat ClothCloth

FranceFrance 5 5 1010

U.K.U.K. 2020 6060


OUTPUTOUTPUT

3. Fundy & Mundy are 2 countries with 3. Fundy & Mundy are 2 countries with comparable resources. Fundy can comparable resources. Fundy can produce either 10 carrots or 12 produce either 10 carrots or 12 celery. Mundy can produce either 10 celery. Mundy can produce either 10 carrots or 4 celery. According to this carrots or 4 celery. According to this informationinformation


OUTPUTOUTPUT

4. Suppose you can paint a room or beat 4. Suppose you can paint a room or beat Super Mario Brothers. Your friend can Super Mario Brothers. Your friend can paint a room in 1 hour. In order for her to paint a room in 1 hour. In order for her to have a comparative advantage in have a comparative advantage in painting a room, how many times must painting a room, how many times must she be able to beat Super Mario Brothers she be able to beat Super Mario Brothers in 2 hours?in 2 hours?


OUTPUTOUTPUT

Output MethodOutput Method

Output = O = overOutput = O = overCode word: “per”Code word: “per”What to do: put output of “other” What to do: put output of “other”

product OVER output of “at issue” product OVER output of “at issue” product for each personproduct for each person

Amount or # must refer to the units of Amount or # must refer to the units of the product produced with a fixed the product produced with a fixed amount of resourcesamount of resources

Output PracticeOutput PracticeProduced per hourProduced per hour

BreadBread Milk Milk

AA AA AAAA

GabrielleGabrielle 44 33

¾¾ 4/34/3

CACA

AlphonseAlphonse 11 22

22 ½½

CACA

Input MethodInput Method

Input = inInput = inCode word: “to”Code word: “to”What to do: put the other product they What to do: put the other product they

make into or under the “at issue” make into or under the “at issue” productproduct

Amount or # must refer to the units of Amount or # must refer to the units of resources used to make a fixed resources used to make a fixed amount of the productamount of the product

Input PracticeInput PracticeAcres to make one unitAcres to make one unit

ApplesApples PearsPears

AAAA

HarshaHarsha 55 33

5/35/3 3/53/5

CACA

CACA

RajaRaja 66 33

22 1/21/2

The following chart illustrates the # of hours The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 it takes to produce 1 loaf of bread and 1 bushel of corn.bushel of corn.

BreadBread CornCornU.S.U.S. 44 22FranceFrance 44 66

Which nation has an Which nation has an absolute absolute advantageadvantage in producing bread? in producing bread?

Neither – both take 4 hoursNeither – both take 4 hours



Which nation has an Which nation has an absolute absolute advantageadvantage in producing corn? in producing corn?

USA – produces a bushel in fewer USA – produces a bushel in fewer hours (fewer resources used)hours (fewer resources used)



Which nation has an Which nation has an comparative advantagecomparative advantage in producing bread?in producing bread?

France – only gives up 2/3s of a bushel of France – only gives up 2/3s of a bushel of corn when making a loaf of bread; U.S. corn when making a loaf of bread; U.S. gives up 2 bushels of corn when making gives up 2 bushels of corn when making the same amount of breadthe same amount of bread



Which nation has an Which nation has an comparative advantagecomparative advantage in producing corn?in producing corn?

USA – only gives up 1/2 of a loaf of bread USA – only gives up 1/2 of a loaf of bread when making a bushel of corn; France when making a bushel of corn; France gives up 1.5 bushels of corn when making gives up 1.5 bushels of corn when making a loaf of breada loaf of bread

The following chart illustrates the # of hours it takes to The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn.produce 1 loaf of bread and 1 bushel of corn.


What will each nation gain if France trades a What will each nation gain if France trades a loaf of bread for a bushel of corn?loaf of bread for a bushel of corn?

US – gets chance to make 2 corn in the time US – gets chance to make 2 corn in the time it takes to make 1 breadit takes to make 1 bread

France – chance to make 1.5 bread rather France – chance to make 1.5 bread rather than make 1 cornthan make 1 corn

The following chart illustrates the number of The following chart illustrates the number of CDs and pounds of beef that can be CDs and pounds of beef that can be produced in 1 hour.produced in 1 hour.

CDsCDs BeefBeefJapanJapan 44 22CanadaCanada 44 66

Which nation has an Which nation has an absolute absolute advantageadvantage in producing CDs? in producing CDs?

Neither – both make the same amount Neither – both make the same amount in 1 hourin 1 hour



Which nation has an Which nation has an absolute absolute advantageadvantage in producing beef? in producing beef?

Canada – makes 6 in 1 hour compared Canada – makes 6 in 1 hour compared to 2 from Japanto 2 from Japan



Which nation has an Which nation has an comparative advantagecomparative advantage in producing CDs?in producing CDs?

Japan – only gives up ½ a beef when making Japan – only gives up ½ a beef when making a CD; Canada gives up 1.5 CDs when a CD; Canada gives up 1.5 CDs when making 1 beefmaking 1 beef



Which nation has an Which nation has an comparative advantagecomparative advantage in producing beef?in producing beef?

Canada – only gives up 2/3s of a CD when Canada – only gives up 2/3s of a CD when making a beef; Japan gives up making 2 making a beef; Japan gives up making 2 beef when making 1 CDbeef when making 1 CD

Why should a nation produce according Why should a nation produce according to its comparative advantage?to its comparative advantage?

If each nation If each nation produces what it produces what it is comparatively is comparatively best at making, best at making, then they can then they can trade to fill in trade to fill in what they are what they are less efficient at less efficient at producing.producing.

WARNING!!WARNING!!

Because test makers are evil, you MAY Because test makers are evil, you MAY see…see…

AndrewAndrew SeanSean

PicklesPickles 55 66

GarlicGarlic 33 33

What is difficult about the chart?What is difficult about the chart?

Absolute & Comparative Advantage. Absolute Advantage (AA) “the best” -- whoever has the most...

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