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Absolute & Comparative Advantage

Absolute & Comparative Advantage. Macroeconomics – Unit 1. Lesson 2. Adam Smith What were Smith’s 2 revolutionary ideas in economics?. 1. That by each acting in our own self-interest, our economy is best served. 2. Specialization in production greatly increases productivity.

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Absolute & Comparative Advantage

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  1. Absolute & Comparative Advantage Macroeconomics – Unit 1 Lesson 2

  2. Adam Smith What were Smith’s 2 revolutionary ideas in economics? 1. That by each acting in our own self-interest, our economy is best served. 2. Specialization in production greatly increases productivity.

  3. What was David Ricardo’s revolutionary idea in economics? One country should still trade with another country even though it is a better producer of everything. David Ricardo 1772-1823

  4. Define Comparative Advantage One entity can produce something at a L_________ M________ O____________ P____________ C________ than another entity. One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity.

  5. In previous comparative advantage problems, we looked at how long it took a country to produce something. Now we’ll look at it differently called total production.

  6. Using all of their resources efficiently Singapore and South Korea can produce sewing machines and dryers as follows: Singapore South Korea sewing machines 20 15 dryers 60 25 Which country should produce dryers and which sewing machines?

  7. Singapore South Korea sewing machines 20 15 dryers 60 25 To determine which country has the comparative advantage, we must determine opportunity cost. That is we must determine what it costs a country to produce a “dryer” instead of a “sewing machine.”

  8. Singapore South Korea sewing machines 20 15 dryers 60 25 1:3 Singapore: what is the cost of 1 sewing machine? Every time Singapore makes 1 sewing machine it gives up _____ dryers? Can you see the ratio?

  9. Singapore South Korea sewing machines 20 15 dryers 60 25 / 20 = 1 / 20 = 3 If you can’t see the ratio, try this: You want to know the cost of 1 sewing machine, so reduce sewing machines to 1. Then reduce dryers by the same number. The cost of 1 sewing machine is 3 dryers.

  10. Singapore South Korea sewing machines 20 15 dryers 60 25 / 15 = 1 / 15 = 1 2/3 What’s the cost of 1 sewing machine in South Korea? The cost of 1 sewing machine in South Korea is 1 2/3 dryers.

  11. Now compare the costs of sewing machines in the 2 countries and determine who should produce them. Singapore South Korea sewing machines 20 15 dryers 60 25 / 20 = 1 / 15 = 1 / 20 = 3 / 15 = 1 2/3 Who should produce sewing machines…that is….for which country is it cheaper? South Korea

  12. Guatemala El Salvador shirts 45 20 tennis shoes 15 6 Gautemala 1/3 The cost of 1 shirt = ___ tennis shoes 3 The cost of 1 tennis shoe = ___ shirts El Salvador 3/10 The cost of 1 shirt = ___ tennis shoes 3 1/3 The cost of 1 tennis shoe = ___ shirts

  13. Ghana Morocco mirrors 24 10 rugs 6 2 Ghana 1/4 The cost of 1 mirror = ___ rug 4 The cost of 1 rug = ___ mirrors Morocco 1/5 The cost of 1 mirror = ___ rug 5 The cost of 1 rug = ___ mirrors

  14. How do you double-check to make sure you’ve done the math correctly? Look for reciprocals. Ghana 1/4 The cost of 1 mirror = ___ rug 4 The cost of 1 rug = ___ mirrors Morocco 1/5 The cost of 1 mirror = ___ rug 5 The cost of 1 rug = ___ mirrors

  15. Be careful: • Read each problem to determine – • is this telling me number of labor hours or resources needed to produce ……or • is this telling me total production? • The analysis is different!

  16. Also for those comparative advantage questions that are examining output, the data may be presented to you graphically. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 Assume that two countries have the resources that permit them to produce cars and tractors as shown above.

  17. You can convert the graphic data into a chart to answer the questions. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 AtlantisXanadu cars tractors 30 10 20 40

  18. Absolute Advantage means…… that a particular entity can produce more of a specific commodity than another entity using the same amount of resources.

  19. Comparative Advantage means …… l m o p c that a particular entity can produce a specific commodity at a lower marginal opportunity production cost than another entity. the end!

  20. classwork assignment: 15 min working with a partner AP Workbook, p. 13-14, B. 4. You will turn in this paper for a classwork grade.

  21. “I can’t teach everyone.” Steven Reff AP Instructor Economics Educator Pueblo High School Tucson, AZ

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