Transcript Absolute and Comparative Advantage PPT – ZB

Absolute Advantage
• When it is possible for one country to
produce more goods and services than
other countries with the same level of
inputs (lower cost/unit)
• Eg. Zambia has large reserves of copper
ore  is better suited to produce copper
for export
• This is not main reason for international
trade
Comparative Advantage
• When a country can produce a good or
service at a lower opportunity cost than
another country
• Even if absolute disadvantage exists for a
country, it can still benefit its neighbours
with trade by focusing on the good with a
lower opportunity cost than theirs (they
give up less than the other country)
Comparative Advantage & PPF
Corn
9
Because the PPF
gradients are different,
these two countries have
different opportunity
costs between Corn and
Wheat they will trade!
Country X
6
**Opportunity cost =
sacrifice/gain
Country Y
5
6
Wheat
The opp. cost of Country Y producing wheat is 6/5 (sacrifice over gain)
The opp. cost of Country X producing wheat is 9/6
So, Country X should do the wheat (lower opportunity cost)
Comparative Advantage & PPF
Corn
6
Because the PPF
gradients are the same,
these two countries have
the same opportunity costs
between Corn and Wheat
they will not trade!
Country X
5
* Country X MAY have an
absolute advantage, or it
may just have more
resources.
Country Y
5
6
Wheat
Comparative Advantage &
Opportunity Cost
Country A
Country B
Wheat
5
4
Corn
10
2
Opportunity Costs:
For country A to gain 1 unit of wheat, they would give up 2 units of corn.
For country B to gain 1 unit of wheat, they would give up ½ unit of corn.
For country A to gain 1 unit of corn, they would give up ½ unit of wheat
For country B to gain 1 unit of corn, they would give up 2 units of wheat
Country A should produce corn and country B should produce wheat
Comparative Advantage &
Opportunity Cost
China
Japan
Textiles
15
1
Cars
5
4
Opp. cost in China of 1 unit of textile is 1/3 car
Opp. cost in Japan of 1 unit of textile is 4 cars
Opp. cost in China of 1 car is 3 units of textile
Opp. cost in Japan of 1 car is 1/4 unit of textiles
China should produce textiles & Japan cars.