Transcript Tuesday, August 20th, 2013

 Bellringer: Read about Tiger Woods’s dilemma written
by N. Gregory Mankiw. Write the following question
and answer on your bell ringer sheet below today’s
date.
Should Tiger Woods mow his own lawn? Why or why
not? Explain how people can benefit from specializing
in certain tasks and trading.
Tiger Woods spends a lot of time walking around on grass. One of
the most talented golfers of all time, he can hit a drive and sink a
putt in a way that most casual golfers only dream of doing. Most
likely, he is talented at other activities too. For example, let’s
imagine that Woods can mow his lawn faster than anyone else.
But just because he can mow his lawn fast, does this mean he
should?
To answer this question, we can use the concepts of opportunity
cost and comparative advantage. Let’s say that Woods can mow
his lawn in 2 hours. In that same 2 hours, he could film a
television commercial for Nike and earn $10,000. By contrast,
Forrest Gump, the boy next door, can mow Woods’s law in 4
hours. In that same 4 hours, he could work at McDonald’s and
earn $32. Who should mow Tiger’s grass?
 In this example, Woods’s opportunity cost of mowing
the lawn is $10,000 and Forrest’s opportunity cost is
$32. Woods has an absolute advantage in mowing laws
because he can do the work in less time. Yet Forrest
has a comparative advantage in mowing lawns because
he has the lower opportunity cost.
 The gains from trade in this example are tremendous.
Rather than mowing his own law, Woods should make
the commercial and hire Forrest to mow the law.
 EQ: How do you compute comparative advantage and
terms of trade?
 Agenda
1. Bellringer-Tiger Woods’s Dilemma
2. Lecture--Definitions
3. Burt and Betty Role Play
4. Lecture
5. Practice Problems
 Theory from David Ricardo
 Explains the benefits of different individuals (or
countries) specializing in a task (mowing laws, making
commercials) and then trading.
 Absolute advantage—the ability to produce more with
the same amount of resources.
 Comparative advantage—the ability to produce with
the least amount of opportunity cost
Who is better at cleaning the dishes?
1.

Betty
If Bert and Betty work together, how many loads can
they do in one hour?
2.

3 loads—Betty can do two by herself and Bert can do
one.
How many minutes would it take for them to wash
one load of dishes working together?
3.

20 minutes—one hour (60 minutes) divided by 3
Who is better at sweeping up and taking out the
trash?
4.

Betty
If Bert and Betty work together, how many loads of
trash can they do in one hour?
5.

4 loads—Betty can do three by herself and Bert can do
one.
How many minutes would it take for them to sweep
up and take out 3 loads working together
6.

45 minutes—one hour (60 minutes) divided by 4= 15
minutes x 3 loads=45
 Time to complete one sink full of dishes
 20 minutes
 Time to complete three loads of trash
 45 minutes
 Total time
 65 minutes
 Time for one sink full of dishes
 30 minutes
 Time to complete 3 loads of trash
 3 hours
 Total
 3 hours
 Time to complete one sink full of dishes
 30 minutes
 Time to complete 3 loads of trash
 1 hour
 Total time=1 hour 30 minutes
 Time to complete one sink full of dishes
 1 hour (by himself)
 Time to complete 3 loads of trash
 1 hour (by herself)
 Total time
 1 hour
 Output problems=number of goods/services produced
 Input problems=amount of time or other resources
used to produce
Dishwashing
Sweeping
Betty
2
3
Bert
1
1
 Step 1: Set up the problem in a table.
 Always set up the problems with the people (countries
in the first column
 Always doing it the same way=less confusion
Dishwashing
Sweeping
Betty
2
3
Bert
1
1
Dishwashing
Betty
2
Bert
1
Sweeping
3
1
Step 2: Find the opportunity cost for each person and
task.
For output problems ONLY—put the opposite number
on top and reduce the fraction (if needed)
Dishwashing
Sweeping
Betty
2 (3/2=1.5
sweeping)
3 (2/3
dishwashing)
Bert
1 (1/1=1
sweeping)
1 (1
dishwashing)
Step 3: Find who has the comparative advantage by
looking at who has the lowest opportunity cost for
each task.
Who has the comparative advantage in dishwashing?
 Look at the dishwashing column
 See who has the lowest number as the opportunity
cost.
Dishwashing
Sweeping
Betty
2 (3/2=1.5
sweeping)
3 (2/3
dishwashing)
Bert
1 (1/1= 1
sweeping)
1 (1
dishwashing)
Who has the comparative advantage in sweeping?
 Look at the sweeping column
 See who has the lowest number as the opportunity
cost.
Dishwashing
Sweeping
Betty
2 (3/2=1.5
sweeping)
3 (2/3
dishwashing)
Bert
1 (1/1=1
sweeping)
1 (1
dishwashing)
 You may be given the entire production possibilities table.
 Only look at the highest 2 numbers
Production Possibilities for Mexico
A
B
C
D
E
Avocados
0
20
24
40
60
Soybeans
15
10
9
5
0
Production Possibilities for USA
A
B
C
D
E
Avocados
0
30
33
60
90
Soybeans
30
20
19
10
0
 Who has the absolute advantage in avocados?
 The US--US can produce 90 and Mexico only 60.
 Who has the absolute advantage in soybeans.
 The US—US can produce 30 and Mexico only 15.
Production Possibilities for Mexico
A
B
C
D
E
Avocados
0
20
24
40
60
Soybeans
15
10
9
5
0
Production Possibilities for USA
A
B
C
D
E
Avocados
0
30
33
60
90
Soybeans
30
20
19
10
0
 Sometimes the problem uses the PPC instead of the
75
60
Un
ite
d
45
es
at
St
Me
o
30
xi c
15
Avocados
90
table.
 Again, look to the highest numbers for each country
(person)
5
10
15
20 25 30
Soybeans
90
75
60
Avocados
Un
ite
d
45
es
at
St
Me
15
o
30
xi c
5
Avocados
United States
Mexico
90
60
10
15
20 25 30
Soybeans
Soybeans
30
15
1.
Find the opportunity cost for each person and task.
• Put the opposite number on top and reduce the
fraction.
• Opportunity cost to produce 1 avocado=
30 soybeans/90 avocados=
1 avocado=1/3 of a soybean
Avocados
Soybeans
United States
90
(1/3)
30
Mexico
60
(1/4)
15
(3)
(4)
Step 2: Find who has the comparative advantage by
looking at who has the lowest opportunity cost for
each task.
Who has the comparative advantage in avocados?
 Look at the avocado column
 See who has the lowest number as the opportunity
cost.
Avocados
Soybeans
United States
90
(1/3)
30
Mexico
60
(1/4)
15
(3)
(4)
Step 2: Find who has the comparative advantage by
looking at who has the lowest opportunity cost for
each task.
Who has the comparative advantage in avocados?
 Look at the avocado column
 See who has the lowest number as the opportunity
cost.
 The Mexico has the comparative advantage
Avocados
Soybeans
United States
90
(1/3)
30
Mexico
60
(1/4)
15
(3)
(4)
Step 2: Find who has the comparative advantage by
looking at who has the lowest opportunity cost for
each task.
Who has the comparative advantage in soybeans?
 Look at the soybean column
 See who has the lowest number as the opportunity
cost.
Avocados
Soybeans
United States
90
(1/3)
30
Mexico
60
(1/4)
15
(3)
(4)
Step 2: Find who has the comparative advantage by
looking at who has the lowest opportunity cost for
each task.
Who has the comparative advantage in soybeans?
 Look at the soybean column
 See who has the lowest number as the opportunity
cost.
Avocados
Soybeans
United States
90
(1/3)
30
Mexico
60
(1/4)
15
(3)
(4)
 US will make soybeans
 Export soybeans
 Import avocados
 Mexico will make avocados
 Export avocados
 Import soybeans
• Sometimes problems will ask about what terms of trade
(price per good) would be beneficial to both nations.
• For example—In order to be beneficial to both nations
what should the terms of trade be for 1 avocado ?
• The easiest thing to do is to look at the column for
avocados and place the terms of trade as in between the
two numbers. 1 avocado for more than ¼ of a soybean but
less than 1/3 of a soybean.
Avocados
Soybeans
United States 90
(1/3)
30
Mexico
(1/4)
15
60
(3)
(4)
• What terms of trade would be beneficial to both nations for 1
soybean?
• 1 soybean for 3.5 avocados
• Must be more than 3 but less than 4.
• Why?
• It costs the US 3 avocados to make a soybean. So they must sell
the soybean at a higher price than they’re cost.
• BUT Mexico can make a soybean for 4 avocados. So in order to
benefit, they must pay less than 4 avocados per soybean.
• Who would benefit if the terms of trade were 1 soybean for 5
avocados?
• US—because they are the sellers and they want at least 3
Avocados
United States
Mexico
Soybeans
90
(1/3)
30
60
(1/4)
15
(3)
(4)
1.
2.
3.
4.
5.
Absolute advantage in
wheat?
Absolute advantage in
TVs?
Comparative advantage
in wheat?
Comparative advantage
in TVs?
Who would benefit
from 1 wheat for 2 tvs?
1.
2.
3.
4.
5.
Absolute advantage in wheat? A
Absolute advantage in TVs? A
Comparative advantage in wheat? A
Comparative advantage in TVs? B
Who would benefit from 1 wheat for 2 tvs? A
Wheat
TVs
Country A
200 (1/2)
100
Country B
50
50
(1)
(2)
(1)
 Not looking at how much the person (country) can
produce, but how much resources it takes to produce
the same good.
 Absolute advantage
 Who has the lower number?
 Why? Because it takes him/her less resources.
 Comparative advantage
 Set up the same way
 EXCEPT switch the order to find the opp. cost
 Joe can produce a salad OR a smoothie in only two
minutes, but his new trainee Liz takes much longer to
produce salads—10 minutes. However, she has worked
on her smoothie skills and can turn one out in the
same time as Joe.
 Who has the absolute advantage in salads?
 Joe
 Who has the absolute advantage in smoothies?
 Neither
Salads (production
in minutes)
Smoothies (production
in minutes)
Joe
2
2
Liz
10
2
 Instead of putting the opposite number on top. Put the
same on top.
 Joe is the same 2/2.
 But Liz--To find the opp. cost of producing 1 salad ask
yourself, “How many smoothies could she produce in
the time that it takes for her to produce 1 salad?”
 10/2=5
Salads (production
in minutes)
Smoothies (production
in minutes)
Joe
2
(1)
2 (1)
Liz
10
(5)
2
(1/5)
 Assume that: the US can produce a car in 16 minutes; Japan
can produce one in 14 minutes; the US can produce a
computer in 12 minutes; Japan can produce one in 8
minutes.
1. Which country has the absolute advantage in producing
cars?

Absolute advantage in producing computers?
2.

3.
4.
5.
Japan
Japan
Comparative advantage in producing cars?
Comparative advantage in producing computers?
Terms of trade advantageous to both?
Cars (production in
minutes)
Computers (production in
minutes)
Japan
14
14/8= 7/4= ( 1 ¾ )
8
(4/7)
US
16
16/12=4/3= ( 1
12
(¾)
1/3)
 Who wins with free trade according to the theory of
comparative advantage?
 Everyone?
 Consumers
 Some Producers
 Exceptions—dumping, currency manipulation
 Who may lose with free trade?
 Unskilled/ inadaptable labor
 Society, if unable to deal with problems of poverty with
unemployed unskilled labor