Compad
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Comparative advantage slide 1 The Gains from Trade Why do people specialize in the production of a few goods or services and then trade? Why don't people become self- sufficient instead, producing everything they need?
Transcript of Compad
Comparative advantage slide 1
The Gains from Trade
Why do people specialize in the production of a few goods or services and then trade?
Why don't people become self-sufficient instead, producing everything they need?
Comparative advantage slide 2
An Example
Suppose there are two people, McPherson and Brown.
Both can produce Tacos and Spaghetti, but they are not equally adept.
Comparative advantage slide 3
McPherson's Daily Production Possibilities
tacos
spaghetti10
5
Comparative advantage slide 4
McPherson has preferences that make him want to consume 4 tacos and 2 spaghetti.
[Show his consumption point on the graph.]
Comparative advantage slide 5
McPherson's Daily Production Possibilities
tacos
spaghetti10
5
He consumes 4 tacos and 2 spaghetti
Comparative advantage slide 6
Brown's Daily Production Possibilities
tacos
spaghetti10
5
12
12
Brown
McPherson
Comparative advantage slide 7
Suppose that Brown consumes 5 spaghetti and 7 tacos.
[Show his consumption point on the graph.]
Comparative advantage slide 8
Brown's Daily Production Possibilities
tacos
spaghetti10
5
12
12
Brown consumes 7 tacos and 5 spaghetti
Comparative advantage slide 9
Without specialization and trade here's where they are in production and consumption:
S TBrown 5 7McPherson 2 4
Total 7 11
Comparative advantage slide 10
Absolute advantage: A person has an absolute advantage in the production of a good if he/she uses less inputs to produce a unit of the good.
Notice that Brown has an "absolute advantage" in the production of both goods.
Comparative advantage slide 11
Comparative advantage: A person has a comparative advantage in the production of a good if that person can produce an extra unit of the good at lower opportunity cost.
Comparative advantage slide 12
Be sure you can answer these questions:
1) What's McPherson's cost of one more plate of spaghetti?
2) What's Brown's cost of one more plate of spaghetti?
3) Who has the "comparative advantage" in spaghetti production?
Go to hidden slide
Comparative advantage slide 14
Now let McPherson specialize completely in the production of spaghetti, and Brown specialize completely in the production of tacos.
Comparative advantage slide 15
The table at the right shows total production with specialization. More is produced of both goods.
S TBrown 0 12McPherson 10 0
Total 10 12
S TBrown 5 7McPherson 2 4
Total 7 11
No specialization Specialization
Comparative advantage slide 16
If Brown and McPherson can arrange to specialize and then trade, both can be better off. There’s more of both goods!
In this case the gains from specialization are 3 plates of spaghetti and 1 taco.
