2.01 Understand the concept of comparative advantage and

global factors of production

A Rice Culture

Rice grown in JapanGrown on small farmsJapanese consumers pay up to 7x more

than US consumersMultiple uses of rice (clothing, mats, &

household items)Japanese government subsidiesPowerful farmers’ lobby700% tariff on imported rice

Economic theories Absolute advantage - a country can produce more

units of a product at a lower cost using fewer resources than other countriesEx) US - absolute advantage over Japan in rice & cotton

production, can produce at lower price per unit than JapanEx) US - absolute advantage over France in cheese

production; can produce at lower price per unit than FranceEx) Canada - absolute advantage with lumber production;

can produce at lower price than other countriesEx) China - absolute advantage over the US in toy

production; can produce at lower price than US

Economic theories (con’t) Comparative advantage - a country should specialize in the

production of a product that it can produce relatively better, or more efficiently than other countriesMore efficiently includes being able to produce product with

lower opportunity costEx) Japan – comparative advantage over US producing rice, can

produce more efficiently with lower opportunity cost than USEx) US - comparative advantage over Japan producing cotton, can

produce more efficiently with lower opportunity cost than JapanEx) Brazil - comparative advantage over US producing coffee; can

produce more efficiently with lower opportunity cost than UShttp://www.youtube.com/watch?v=Pd_qs8ueIWwhttp://www.youtube.com/watch?v=Vvfzaq72wd0Two you-tube videos on absolute & comparative advantages

Economic theories (con’t) Production possibility curve - a hypothetical

representation that shows tradeoff in production shifting resources between 2 products

• Producing more of 1 product reduces production on other

• Tradeoff slope represents opportunity cost

• http://www.youtube.com/watch?v=uWwrb--yk-w&feature=related

• Production possibility curve video

Economic theories (con’t)Opportunity cost - value of what is given up in

producing 1 product when another is producedEx) Japan - more efficient producing rice than cotton;

focuses more resources on riceEx) US - more efficient at producing cotton than rice;

focuses more resources on cottonhttp://www.investopedia.com/video/play/opportunity-cost

/Opportunity cost video

Economic theories (con’t)Commodity - raw material or agricultural product that

may be same regardless of who produces itEx) Oil from Saudi Arabia - just as valuable as oil from

VenezuelaEx) Rice from US, Japan or Thailand – viewed same by most

western consumers

Global factors of production A country’s comparative advantage comes from its

global factors of production. The US has available resources in all factors of production

1. Natural resources - includes land, forests, minerals, oil, & bodies of water

Many African countries rich in gold, diamonds & other minerals

Saudi Arabia, Libya, Iraq & Venezuela - rich in oil.US rich in farmland, fresh water &natural gas.

Global factors of production2. Human resources - (or labor) includes workers,

management & entrepreneursDeveloped countries such as Japan, Germany, UK & US

rich in skilled labor & management expertiseChina rich in low-cost labor

Global factors of production3. Capital resources - (or man-made items) includes

buildings, machinery & fundsDeveloped countries such as Japan, Germany, UK & US

rich in capital; funds to invest in infrastructure, business ventures.

Underdeveloped countries such as Guatemala, Liberia & Nepal lack capital to invest in infrastructure & business ventures

Comparative advantage of nationsCountry’s industries develop through strong internal

competition Ex) Coke vs. Pepsi; AT&T vs. Verizon

Japanese companies - comparative advantage in producing small home electronic devices such as TVs & cameras

US -comparative advantage in entertainment industry, exporting movies & TV shows Ex) Disney exports theme park management skills to Japan,

Hong Kong, etc.Only the strongest & best producers survive