Absolute and Comparative
Absolute and Comparative
• Joe Smith started the day early having set his alarm clock
(MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN
CHINA) was perking, he shaved with his electric razor
(MADE IN HONG KONG). He put on a dress shirt (MADE
IN SRI LANKA), designer jeans (MADE IN SINGAPORE)
and tennis shoes (MADE IN KOREA). After cooking his
breakfast in his new electric skillet (MADE IN INDIA) he sat
down with his calculator (MADE IN MEXICO) to see how
much he could spend today. After setting his watch (MADE IN
TAIWAN ) to the radio (MADE IN INDIA) he got in his car
(MADE IN GERMANY) filled it with GAS from Saudi Arabia
and continued his search for a good paying AMERICAN
JOB. At the end of yet another discouraging and fruitless
day checking his computer (MADE IN MALAYASIA), Joe
decide to relax for a while. He put on his sandals (MADE
IN BRAZIL) poured himself a glass of wine (MADE IN
FRANCE) and turned on his TV (MADE IN INDONESIA),
and then wondered why he can't find a good paying job
Actually this is a good thing. We get more choices, lower
prices, & because more is bought, more jobs are created.
I Can do 8
do 42 advantage,
I have an
I can do
I can clean that
house in 4 hours.
Future Owl Maid
I’m more efficient. I can do the
same work in 3 hours so I have
an absolute advantage.
Future Golden Knight Maid
WHEAT FARMERS ON 100 ACRES OF LAND
5000 BUSHELS PRODUCED
4000 BUSHELS PRODUCED
With trade, a few people lose a lot,
[Lower prices & more choices]
but, a lot of people gain a little.
Free trade is like improved technology
[There are some job losses, but many more job gains]
Comparative advantage due to natural resources & climate
Wheat, corn, and cereals
Oranges and grapefruit
Comparative advantage largely due to physical capital,
human capital, and scientific knowledge
Aircraft, computers, industrial chemicals, plastics, & chemicals
Automobiles, steel, electronics
Machine tools, scientific instruments, luxury automobiles
Textiles Comparative advantage and differences
in opportunity costs are the basis for
specialized production and trade.
• Should Wisconsin grow oranges?
• Should Florida make cheese?
• No & No! [We don’t want the Florida cheeseheads]
Wisconsin should specialize in cheese
Florida should specialize in orange production
Then trade cheese for oranges
More cheese and oranges for everyone!
– Job losses among dairy farmers in Florida
– Job losses among orange growers in Wisconsin
gains among dairy farmers in WI and job gains
among orange growers in FL more than make up for the
other job losses.
- Trade is beneficial for both states as a whole …
… though not for all residents.
Econ Lingo: Opportunity cost
How much orange production does WI give up
to produce one more unit of cheese? Very little,
because oranges don’t grow well in WI.
How much cheese production does WI give up
to produce one more unit of oranges? A lot!
More Econ Lingo: Comparative advantage
The country with the lower opportunity cost in
producing one good has a comparative
advantage in that good.
• Wisconsin has a comparative advantage in cheese
production => specialize in cheese
• Florida in orange production => specialize in oranges