Transcript Comparative Advantage

Comparative Advantage
Chapter 2
Jack-of-all-trades, master of none…
 Do we produce everything ourselves?
 Can you imagine a world where you had to produce virtually
everything for yourself—food, clothes, lumber for to build your
house, etc.?
 No, we specialize—we focus our attention on specific tasks,
but which tasks?
Absolute Advantage
 If you take less time, money, or other opportunity cost
measure, to perform a task than your neighbor, you have an
absolute advantage over that person in that task.
Country
A
B
Soybeans
3
12
Textiles
6
4
Absolute Advantage
 Clearly, it costs less per unit to produce soybeans in country A
and less per unit to produce textiles in country B.
 OK, BUT, what if a country has an absolute advantage in the
production of both goods.
 China has lower labor costs across the board compared with the
U.S., so why does China not produce everything?
Comparative Advantage
 We focus on those things where our opportunity costs are
relatively smaller than our neighbor. They may have an
absolute advantage, but everyone is better off if they
specialize in their relative strength.
Country
A
B
Soybeans
3
12
Textiles
6
8
Sources of Comparative Advantage
 Natural Endowments
 Land, Climate, etc.
 Human society and culture
 Important to remember that comparative advantage is not
static; technology, government investment, changes in
tastes and preferences; all change comparative advantage
through time
Production Possibilities
 If we know your
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Coffee (lbs./day)
productivity in each task,
we can construct a
representation of the
choices/combinations of
production—production
possibilities curve
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8
0
0
4
8
Nuts (lbs./day)
Note: The line represents the combinations that
completely exhaust labor availability.
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Rudiments of Exchange
 We can begin to understand economic exchange and
opportunity cost through the PPC.
loss in coffee
OC nuts 
gain in nuts
 Based on the graph, the OC for one pound of nuts is 2 pounds
of coffee, or, conversely, the opportunity cost of one pound
of coffee
 is ½ pound of nuts.
 The downward slope of the PPC reflects the Scarcity
Principle—to get more of one good, we must give up some of
the other
Differing Productivity and the PPC
 Different rates of
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Coffee (lbs./day)
productivity (i.e., different
comparative advantage)
can affect the shape of the
PPC)
8
4
0
0
8
16
Nuts (lbs./day)
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Combinations
 By combining producers
and specializing, more of
each good is produced and
can be consumed
Coffee (lbs./day)
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Specializing and trading
yields more of both
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0
12
Nuts (lbs./day)
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PPC for a Many Person Economy
Class Discussion
 Causes and Consequences; “The Locavore’s Dilemma”
 Costs and benefits of outsourcing