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# Module 4-”Comparative Advantage and Trade” - PowerPoint PPT Presentation

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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By. J.A.SACCO

• 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)

• 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 METHOD)

CD’sBeef

Japan 4 2

• 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 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 METHOD)

CD’sBeef

Japan 4 2

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

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

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

Japan

4. Which has a comparative advantage in beef?

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)

• 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 METHOD)

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 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 METHOD)

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.

1. Calculate the opportunity costs of production for each country

2. Determine the comparative advantage for each country

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.