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Absolute Advantage and Comparative Advantage

Absolute Advantage and Comparative Advantage. Is This A Bad Thing?.

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Absolute Advantage and Comparative Advantage

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  1. Absolute Advantage and Comparative Advantage

  2. Is This A Bad Thing? • Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt(MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE INTAIWAN ) to the radio(MADE IN INDIA) he got in his car(MADE IN GERMANY) filled it with GASfrom Saudi Arabia and continued his search for a good paying AMERICANJOB. At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYASIA), Joe decide to relax for a while. He put on his sandals (MADE IN BRAZIL)poured himself a glass of wine (MADE IN FRANCE) and turned on his TV(MADE IN INDONESIA), and then wondered why he can't find a good paying job in America..... Actually this is a good thing. We get more choices, lower prices, & because more is bought, more jobs are created.

  3. Comparative Advantage – can produce a product at a "lower opportunity cost". Absolute Advantage[outputs] – can produce "absolutely more" with the same inputs. [Inputs are constant as outputs vary] Absolute Advantage[inputs] – can produce "absolutely faster" the same output. [Outputs are constant as inputs vary]

  4. Absolute Advantage – [outputs] can produce "absolutely more" with the same inputs [more efficient]. I Can do 42 push-ups, but 102 if you play the Aggie Fight Song. I Can do 8 push-ups. I have an absolute advantage, I can do 42 push-ups. FSU Seminole UF Gator Absolute Advantage – [inputs] can produce "absolutely faster" the same output [more efficient]. I’m more efficient. I can do the same work in 3 hours so I have an absolute advantage. I can clean that house in 4 hours. Future Owl Maid Future Golden Knight Maid

  5. WHEAT FARMERS ON 100 ACRES OF LAND 5000 BUSHELS PRODUCED 4000 BUSHELS PRODUCED ABSOLUTE ADVANTAGE

  6. COMPARATIVE ADVANTAGE [Their jobs] With trade, a few people lose a lot, [Lower prices & more choices] but, a lot of people gain a little. Free trade is like improved technology [There are some job losses, but many more job gains]

  7. Examples of Comparative Advantage Country Comparative advantage due to natural resources & climate United States Wheat, corn, and cereals Canada Timber Saudi Arabia Oil France Wine Brazil Coffee Israel Oranges and grapefruit Mexico Tomatoes Comparative advantage largely due to physical capital, Country human capital, and scientific knowledge United States Aircraft, computers, industrial chemicals, plastics, & chemicals Japan Automobiles, steel, electronics Germany Machine tools, scientific instruments, luxury automobiles United Kingdom Financial services Taiwan Textiles Switzerland Watches South Korea Ships Comparative advantage and differences in opportunity costs are the basis for specialized production and trade.

  8. Why are economists in favor of free trade? • Should Wisconsin grow oranges? • Should Florida make cheese? • No & No! [We don’t want the Florida cheeseheads] • Wisconsin should specialize in cheese • Florida should specialize in orange production • Then trade cheese for oranges • More cheese and oranges for everyone! • Disadvantages: • Job losses among dairy farmers in Florida • Job losses among orange growers in Wisconsin • Advantage: - Job gains among dairy farmers in WI and job gains among orange growers in FL more than make up for the other job losses. - Trade is beneficial for both states as a whole … … though not for all residents.

  9. Econ Lingo: Opportunity cost • How much orange production does WI give up to produce one more unit of cheese? Very little, because oranges don’t grow well in WI. • How much cheese production does WI give up to produce one more unit of oranges? A lot!

  10. More Econ Lingo: Comparative advantage • The country with the lower opportunity cost in producing one good has a comparative advantage in that good. • Wisconsin has a comparative advantage in cheese production => specialize in cheese • Florida in orange production => specialize in oranges Comparative advantage Comparative advantage

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