Transcript Comparative Advantage - New Paltz Middle School

KEY CONCEPTS
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Production Possibility Curve (Frontier): a graph (usually a convex curve) that
shows all the possible maximum (i.e., efficient) combinations of goods that could
be produced with the available resources given existing technology; aka PPC
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Absolute Advantage: a country’s ability to produce more of a good/service than
another country
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Comparative Advantage: A country has a comparative advantage over another in
the production of a good if it can produce it at a lower opportunity cost: i.e. it has
to forego less of other goods in order to produce it
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Gains from Trade: It is beneficial for countries to trade (vs. being self-sufficient).
When each country produces goods it has a comparative advantage in
(specialization) and trades them for other goods, everybody gets more of the
goods they want
PRODUCTION POSSIBILITIES CURVE
• This country can produce guns
and/or butter
• Point A is inefficient
• Point X is not possible
• Any point on the PPC is
efficient
COMPARATIVE ADVANTAGE
Mary has comparative advantage in grapes because her PPC curve has a steeper slope; she is giving up
less nuts to produce grapes
This is true for all of the graphs—absolute advantage does NOT mean comparative advantage
FIGURING IT OUT
UK
India
Total
Textiles (per hour) Books (per hour)
1
4
2
3
3
7
• For the UK to produce 1 unit of textiles it has an opportunity cost of 4
books (4 books/1 textile). However for India to produce 1 unit of textiles
it has an opportunity cost of 1.5 books (3 books/2 textiles)
• Therefore India has a comparative advantage in producing clothing
because it has a lower opportunity cost
• The UK has a comparative advantage in producing books (1/4 UK vs.
2/3 India)
• So China should produce clothing and trade with the UK for computers
THE OTHER WAY AROUND
UK
India
Total
Hours per Textile Hours per Book
1
4
2
3
3
7
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For hours per good, take the reciprocal. UK’s opportunity cost for textile is 1/4
book, India’s opportunity cost for textile is 2/3 book.
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UK has comparative advantage in textiles
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India has comparative advantage in books (3/2 India vs. 4 UK)
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UK should produce textiles and trade India for books
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WHEN TRADING: A country will only trade if the cost of obtaining the good is less
than its own opportunity cost
HOW DOES IT RELATE?
Comparative advantage connects to:
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Scarcity: the PPC is based on scarcity; due to a limited amount of time and
resources, a country can only produce so much of a certain good. Therefore,
comparative advantage should determine what goods a country decides to
produce given its resources.
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Government Taxation: governments try to prevent the negative effects of
comparative advantage (i.e. outsourcing, trade deficit) by imposing tariffs and
other trade barriers to increase the sale of domestic goods. It is actually more
beneficial to trade.
ECONOMIC ART!
IS THIS REAL LIFE?
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Outsourcing and bringing foreign jobs back to America is a big 2012 election
topic. But are we taking the right approach?
http://online.wsj.com/article/SB100014240529702041242045771548942705
77660.html
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The US should focus on manufacturing products it has a comparative advantage
in, such as high-tech manufacturing , instead of competing for low-end jobs
http://www.nytimes.com/2011/08/28/magazine/does-america-needmanufacturing.html?pagewanted=all
LET’S PRACTICE!
Which farm has the comparative
advantage in the production of Corn?
a. Reff's farm has the comparative
advantage in the production of corn
because this farm can produce more
corn
b. Reff's farm has the comparative
advantage in the production of corn
because it has the lowest opportunity
cost
c. Bru's farm has the comparative
advantage in the production of corn
because it has the lowest opportunity
cost
d. neither farm has the comparative
advantage in the production of corn
Answer: B
Numbers represent hours/unit
Which country has the comparative advantage in the production of
wine?
a. Portugal because it has the lowest opportunity cost
b. Portugal because it can produce wine faster
c. England because it has the lowest opportunity cost
d. England because it uses fewer resources in the production of guns
Answer: A
Determine which country should specialize
in the production of guns and which should
specialize in the production of butter and
determine why
a. Oodles should specialize in the
production of butter because it can produce
more butter and Nerc should specialize in
the production of guns because it uses
fewer resources
b. Oodles should specialize in the
production of buttter because it has the
lowest opportunity cost and Nerc should
specialize in guns because it has the lowest
opportunity cost
c. Oodles should specialize in guns
because it has the lowest opportunity cost
for guns and Nerc should specialize in
butter because it has the lowest opportunity
cost for butter
d. Oodles should specialize in both guns
and butter because it can produce more of
each good
Answer: C
FREE RESPONSE PRACTICE
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1999 q.2
http://apcentral.collegeboard.com/apc/members/repository/microeco_99.pdf
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Answers
http://apcentral.collegeboard.com/apc/members/repository/sg_microeco_99.pdf