Module 4 comparative advantage and trade
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Module 4-”Comparative Advantage and Trade”. By. J.A.SACCO. Absolute and Comparative Advantage. Countries/Individuals trade to maximize production- specialization is the KEY!

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Module 4-”Comparative Advantage and Trade”

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Module 4 comparative advantage and trade

Module 4-”Comparative Advantage and Trade”

By. J.A.SACCO


Absolute and comparative advantage

Absolute and Comparative Advantage

  • Countries/Individuals trade to maximize production- specialization is the KEY!

  • Absolute Advantage- One nation can produce more output with the same quantity of inputs (factors of production) as the other.

  • Comparative Advantage-One nation can produce a good at a lower opportunity cost than the other- determines how countries specialize.

    Example- Babe Ruth?


Determining comparative advantage output method

Determining Comparative Advantage(OUTPUT METHOD)

  • Over a given period of time- Ex: tons per acre, miles per gallon, words per minute, apples per tree.

  • In order to find comparative advantage is to find who has the lowest opportunity cost.

  • The following chart illustrates the number of CD’s and pounds of beef that can be produced in one hour.


Determining comparative advantage output method1

Determining Comparative Advantage(OUTPUT METHOD)

CD’sBeef

Japan 4 2

Canada 4 6

Comparative Advantage

  • To find the opportunity cost for “A”,divide “B” by “A”.

  • To find the opportunity cost for “B” ,divide “A”by “B” .

    LOWER IS BETTER!


Determining comparative advantage output method2

Determining Comparative Advantage(OUTPUT METHOD)

  • Which nation has an absolute advantage in producing CD’s?

  • Which nation has an absolute advantage in producing beef?

  • Which has a comparative advantage in CD’s?

  • Which has a comparative advantage in beef?

  • Should Japan specialize in CD’s or beef?

  • Should Canada specialize in CD’s or beef?


Determining comparative advantage output method3

Determining Comparative Advantage(OUTPUT METHOD)

CD’sBeef

Japan 4 2

Canada 4 6

1, Which nation has an absolute advantage in producing CD’s?

Japan and Canada

2. Which nation has an absolute advantage in producing beef?

Canada

3. Which has a comparative advantage in CD’s?

Japan

4. Which has a comparative advantage in beef?

Canada

5. Should Japan specialize in CD’s or beef?

CD’s

6. Should Canada specialize in CD’s or beef?

Beef

* To produce 1 ___, your opportunity cost is ___.


Determining comparative advantage input method

Determining Comparative Advantage(INPUT METHOD)

  • Inputs (usually time) to complete an activity. Ex:# of hours to do a job, #of gallons of paint to paint a house, #of acres to feed a horse

  • The key again is to find the lowest opportunity cost

  • The following chart illustrates the number of hours it takes to produce one loaf of bread and one bushel of corn


Determining comparative advantage input method1

Determining Comparative Advantage(INPUT METHOD)

Hrs/1Bread Hrs/1 Corn

U.S.4 2

France 4 6

  • For absolute advantage in input method lower # of inputs used is better.

  • To find the opportunity cost for “A”,divide “A” by “B”.

  • To find the opportunity cost for “B” ,divide “B” by “A”.

  • For comparative advantage in input method, lower is better!


Determining comparative advantage input method2

Determining Comparative Advantage(INPUT METHOD)

  • Which nation has an absolute advantage in producing bread?

  • Which nation has an absolute advantage in producing corn?

  • Which has a comparative advantage in bread?

  • Which has a comparative advantage in corn?


Determining comparative advantage input method3

Determining Comparative Advantage(INPUT METHOD)

Hrs/1BreadHrs/1Corn

U.S. 4 2

France 4 6

*To produce 1 ____, your opportunity cost is ____.

1. Which nation has an absolute advantage in producing bread?

France/U.S.

2. Which nation has an absolute advantage in producing corn?

U.S.

3. Which has a comparative advantage in bread?

France

4. Which has a comparative advantage in corn?

U.S.

Note in either the output method or the input method, you cannever have a comparative advantage in both goods.


Production possibilities for two countries

Production Possibilities for Two Countries

1. Calculate the opportunity costs of production for each country

2. Determine the comparative advantage for each country


Production possibilities for two countries1

Production Possibilities for Two Countries


Production possibilities for two countries2

Production Possibilities for Two Countries

Bangladesh has a comparative advantage in Cotton Shirts (C) because they only give up 1/3 unit of medicine while The United States must give up 1 unit of medicine to gain 1 cotton shirt.

The United States has a comparative advantage in Malaria Medicine (M) because they only give up 1 cotton shirt while Bangladesh must give up 3 cotton shirts to gain 1 unit of medicine.


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