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Mr. Gerdes’ AP Macroeconomics. Comparative Advantage. Ricky Ricardo. Lucy’s Cuban-American husband drumming on the bongo. David Ricardo. English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.

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Mr gerdes ap macroeconomics

Mr. Gerdes’AP Macroeconomics

Comparative Advantage


Ricky ricardo
Ricky Ricardo

  • Lucy’s Cuban-American husband drumming on the bongo.


David ricardo
David Ricardo

  • English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.


Absolute advantage v comparative advantage
Absolute Advantage v. Comparative Advantage

  • Absolute Advantage

    • Faster, more, more efficient

  • Comparative Advantage

    • Lower opportunity cost


Specialization
Specialization

  • Producing according to comparative advantage


Example
Example

  • Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what.



Example2
Example

Who has the absolute advantage in baking cakes?

Who has the absolute advantage in making pizza?


Example3
Example

Why?

Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.


Example4
Example

Who has the comparative advantage in baking cakes?

Who has the comparative advantage in making pizza?


Example5
Example

Who has the comparative advantage in baking cakes?

Who has the comparative advantage in making pizza?


Example6
Example

Why?

Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake.


Example7
Example

Furthermore, it only cost David 1/3of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.


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