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Absolute Advantage and Comparative Advantage

Absolute Advantage and Comparative Advantage. Comparative Advantage – can produce a product at a "lower opportunity cost". Absolute Advantage[outputs] – can produce absolutely more with the same inputs. Absolute Advantage[inputs] – can produce absolutely faster with the same inputs.

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Absolute Advantage and Comparative Advantage

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  1. Absolute Advantage and Comparative Advantage

  2. Comparative Advantage – can produce a product at a "lower opportunity cost". Absolute Advantage[outputs] – can produce absolutely more with the same inputs. Absolute Advantage[inputs] – can produce absolutely faster with the same inputs.

  3. Absolute Advantage – [outputs] can produce absolutely more with the same inputs [more efficient]. I Can do 8 push-ups. I have an absolute advantage in the production of push-ups. I Can do 42 push-ups. Texas Longhorn Texas Aggie Absolute Advantage – [inputs] can produce absolutely faster with the same inputs [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 Longhorn Maid Future Aggie Maid

  4. PPC –before trade & specialization– prisoners of their own PPC’s and CPC’s 80 Before trade, I’m a prisoner of my own PPC. C O F F E E PPC CPC 40 [Consumption Possibilities Curve] Haiti Haiti’s Domestic Comparative Cost 1 Bread = 4 Coffees ¼ Bread = 1 Coffee Bread 20 10 0

  5. Comparativeand AbsoluteAdvantage[Comparative Advantagecan produce at a lower productive opportunity cost] • Haiti’s DCCCuba’s DCC • 1B = __ C 1B = __ C • __ B = 1C __ B = 1C Haiti Cuba 100 90 6 4 1/4 1/6 80 Terms of Trade 1 bread = __coffees “A prisoner of my own PPC.” “I can consume only on my PPC.” 5 Coffee Coffee World CC 1Bread=__ Coffees __ Bread=1 Coffee 5 0 1/5 o Bread 18 20 15 Bread “Trade is the free lunch of economics.” 1. (Haiti/Cuba) has anabsolute advantage in coffeeand (Haiti/Cuba) has an absolute advantage in bread. 2.Haitiwill export(bread/coffee)[comparative advantage]andimport(bread/coffee). [comparative disadvantage] &Cubawillexport(bread/coffee) &import(bread/coffee). 3. Mutuallyadvantageous tradecan occur between Haiti & Cuba when1 breadis exchanged for (3/5/7)tons of coffee. Production in both is subject to (increasing/constant) opportunity costs. “Export”what it can produceat a lower relative priceand“import”goods it can buy at a lower relative price. Absolute Advantage- more efficient, can produce more with the same number of inputs [who can do the most in absolute numbers] “Do whatyou do best & trade for the rest.”

  6. Trade Allows Nations to Consume Beyond Their PPCs While Producing On It We are suspending reality. 100 CPC (after trade) CPC(before trade) 80 PPC (before & after trade) 10 breads & 50 coffees 11 breads and 45 coffees 50 10 breads and 40 coffees 40 45 12 breads & 40 coffees Coffee “I’m outa here.” “Now with trade, you can escape your PPC and consume more of both bread and coffee.” 0 20 10 Bread

  7. Comparative Advantage 2 Brazil Chile 30 Brazil’s DCCChile’s DCC 1 W = __ S 1 W = __ S ___W = 1S ___W = 1S 2 4 20 ½ ¼ 12 Terms of Trade 1 Wheat= ___ Steels Steel 3 Steel World CC 1 Wheat = __ Steels __ Wheat = 1 Steel 0 4 3 Wheat 10 0 Wheat 3 1/3 4.Chilehas acomparative advantagein (wheat/steel) & anabsolute advantage in (wheat/steel/both).Brazilhas acomparative advantagein (wheat/steel). 5. Theopportunity cost of one unit of wheat forChileis (2/4/6) units of steel. Theopportunity cost of one unit of steel for Brazilis (1/2 or ¼ ) wheat. 6. If the 2 countries trade,Chilewouldexport(wheat/steel) & import (wheat/steel). If the 2 countries traded,Brazilwouldexport(wheat/steel) & import (wheat/steel).

  8. Comparative Advantage 3 DCC for U.S.DCC for Brazil 1 H = __ B 1 H = __ B ___H = 1B ___ H = 1B 70 Brazil 40 14 10 1/14 1/10 Bread Bread Terms of Trade 1 Ham = __ Bread 0 5 Ham 0 Ham 4 12 8.Brazilhas a comparative advantagein (bread/ham) and a comparative disadvantagein (bread/ham). 9. Theopportunity cost of producing 1 unitof ham for the U.S. is (10/12/14) breads. 10. Acceptableterms of trademight be 1 ham for (8/12/16) breads.

  9. Comparative Advantage 5 FroggyABCDEDCC: FroggyWoggyABCDEDCC: Woggy Pork(tons) 4 3 2 1 0 1P = __ B Pork(tons)8 6 4 2 0 1P = __ B Beans(tons) 0 5 10 15 20 __ P = 1B Beans(tons)0 6 12 18 24 __ P = 1B 3 5 1/3 1/5 Terms of Trade 1 Pork = __ Beans 4 15. Production in both countries is subject to (increasing/constant) opportunity cost. 16. If these 2 nations specialize in accordance withcomparative advantage, Froggywill produce (pork/beans) &Woggywill produce (pork/beans). 17. InFroggy, the opportunity cost of1 porkis (1/5 or 5 or 3) beans’ 18. Assume that prior to specialization & trade,Froggy produced combo “C”and Woggy produced “B”. If these 2 nations now specialize according tocomparative advantage, thetotal gainswill be (4/2/0) tons of beans & (4/2/0) ton(s) of pork. 19. Feasibleterms of tradewould be (1/6/4) ton ofporkfor (1/6/4) tons ofbeans.

  10. Comparative Advantage 7 DoggyABC DEDCC: DoggyWoggy A B C D E DCC: Woggy Soup 60 45 30 15 0 1S = __ P Soup 20 15 10 5 0 1S = __ P Peanuts 0 15 30 45 60 Peanuts 0 15 30 45 60 __ S = 1P 1 60 3 60 1/3 Terms of Trade 1 Soup = __ Peanuts 2 24. If trade occurs,Doggywill export(soup/peanuts) andimport(soup/peanuts). Woggywillexport(soup/peanuts) andimport(soup/peanuts). 25. ForDoggy, theopportunity cost of 1 soupis (1/2/3) peanuts. ForWoggy, theopportunity cost of 1 soupis (1/2/3) peanuts. 26. Prior to specialization,Doggy & Woggy chose combination“C”. Now each specializes according tocomparative advantage. Thegains from tradewill be (0/20/40) units ofsoup& (0/20/40) units ofpeanuts.

  11. Comparative Advantage 4 FuzzyA BC D EFDCC: FuzzyWuzzy A BCDEFDCC: Wuzzy Plums1500 1200 900 600 300 0 1G = __ P Plums 3500 2500 1500 1000 500 0 1G = __ P Grapes 0 100 200 300 400 500 __ G = 1P Grapes 0 150 300 450 575 700__ G = 1P The countries of: “Fuzzy”and“Wuzzy” 5 3 1/5 1/3 Terms of Trade 1 Grape = __ Plums 4 11. InWuzzy, theopportunity cost of 1 grapeis (1/2/3/4/5) plums. 12.Fuzzyhas acomparative advantagein & should produce (plums/grapes). 13. Theterms of tradewill be1 grapefor somewhere between (3&5/2&6) plums. 14. Assume that ifFuzzy did not specialize it would producecombo “C”and ifWuzzy did not specialize it would produce combo “B”.The gains from specialization and tradeare: (0/100/150) plums and (0/100/150) grapes. 15.Mutualterms of tradebetween Fuzzy and Wuzzy would be1 grapefor (2/4/6/8) plum.

  12. Comparative Advantage 8 [Inputs] [lower # of hours gives absolute advantage] Djibouti DCC: DjiboutiCanada DCC: Canada Fish 10 hours 1W =__F Fish 20 hours 1 W = __ F Wheat 20 hours ___ W=1F Wheat 60 hours ___W = 1F 3 2 1/2 1/3 Terms of Trade: 1 Wheat = __ Fish 2.5 27. (Djibouti/Canada) has anabsolute advantage in bothcommodities. (Djibouti/Canada) has acomparative advantage in producing wheat. 28. (Djibouti/Canada) has anabsolute disadvantage in both, but a comparative advantage in fish. 29.Advantageous tradecan occur between the two when 1 wheat is exchangedfor (1/2.5/3) fish. We are going toturn inputs into outputs. In 20 hours, Djiboutican produce anoutput of 1 wheat or 2 fish. In 60 hours, Canadacan produce anoutput of 1 wheat or 3 fish. Looking at inputs [hours]

  13. Is There A Djibouti?

  14. The Djibouti Booti Note

  15. Comparative Advantage 9 [Inputs] [lower # of hours gives absolute advantage] DCC: U.S.Russia DCC: Russia Caviar 6 hours 1C = __W Caviar 16 hours 1C = __ W Wheat 3 hours __ C =1W Wheat 4 hours __ C = 1W 4 2 1/4 1/2 Terms of Trade 1 Caviar = __ Wheats 3 30. (Russia/U.S.) has anabsolute disadvantagein both commodities. (Russia/U.S.) has acomparative advantage in wheat. 31. (Russia/U.S) has anabsolute advantage in both commodities. (Russia/U.S.) has acomparative advantage in caviar. 31.Advantageous tradecan occur between the two nations when 1 caviar is exchangedfor (1/3/5)tons of wheat. We are once again turning inputs into outputs. In 6 hours, the U.S.A.can produce an output of 1 caviar or 2 wheats. In 16 hours,Russia can produce anoutput of 1 caviar or 4 wheats.

  16. Absolute Advantage [Outputsv.Inputs]Remember that withoutputsorquantity, thelargernumberindicatesabsolute advantage; that countrycan produce absolutelymorewith the same inputs, and ismore efficient. Product Market And withinputs(hours), thesmaller numberindicatesabsolute advantage; that country ismore efficientbecause it can produce a goodabsolutelyfasterthan the otherwith the same inputs. Resource Market

  17. 2nd Most Missed Question On 95 AP Exam [26% correct] • CountryFoodClothing • Ducky20 hours 50 hours • Wucky10 hours20 hours • a.Duckyhas a comparative advantage in the production • of both food and clothing. • b.Wuckyhas a comparative advantage in the production • of both food and clothing. • c.Duckyhas a comparative advantage in food production, & • Wucky has a comparative advantage in clothing production. • d.Duckyhas a comparative advantage in clothing production, • & Wucky has a comparative advantage in food production. • Neither country has a comparative advantage in the • production of either good. Ducky Wucky CountryFoodClothing Ducky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F Terms of Trade might be 1C = 2.2F

  18. Rabbit 1 G = 3 B 1/3 G=1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1/3 B=1G Wabbit 1 B = 2 G 1/2 B=1G Wabbit Rabbit Wabbit Rabbit Product Market [outputs] CountryGunsButter Rabbit 20 units60 units Wabbit 10 units20 units Resource Market[inputs] CountryGunsButter Rabbit 20 hours60 hours Wabbit 10 hours20 hours Whatcountry has an absolute advantage in guns? What country has an absolute advantage inguns? Rabbit Wabbit Why does Rabbit have an absolute advantage in guns? Why does Wabbit have an absolute advantage in guns? Rabbit can produce absolutely more guns than Wabbit [20 units v. 10 units] Wabbit can produce guns absolutely fasterthanRabbit [10 hours v. 20 hours] What country has acomparative advantage in guns? What country has acomparative advantage in guns? Wabbit Rabbit “Let’s change inputs into outputs.” Wabbit can produce guns at a lower opportunitycost [2 butters v. 3 butters] Rabbit can produce guns at a lower opportunity cost [1/3 butter v. 1/2 butter]

  19. Animationeconomics.com

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