Lucy’s Cuban-American husband drumming on the bongo.

English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.

Absolute AdvantageWhomever can produce the most of a certain good

Comparative AdvantageWhomever can produce a good at the

lowest opportunity cost (you give up the least amount of the other good – it “costs” you less to produce a certain good)

Countries can be better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.

Assume David Ricardo and Ricky Ricardo are going to throw a party for economists. They will write songs and make cookies for the party.

David Ricardo

Ricky Ricardo

Songs 2 4

Cookies

6 8

David Ricardo

Ricky Ricardo

Songs 2 4

Cookies 6 8

Who has the absolute advantage in writing songs?Who has the absolute advantage in baking cookies?

If one person/country has the absolute advantage for BOTH

goods, then you must find comparative advantage

1 song costs David 3 cookies 1 song costs Ricky 2 cookies

Ricky can write songs more cheaply, so Ricky should write songs and David should bake cookiesRicky has the “comparative advantage” in writing songsDavid has the “comparative advantage” in baking cookies

Songs Cookies Songs Cookies

2 6 4 8

1 3 1 2 Simplify

Ricky should write songs, David should bake cookies, and they should trade songs for cookies.

BUT, how many cookies should one song equal?

When Ricky writes one song, he gives up the opportunity of baking 2 cookies, so he wants to sell his songs for MORE than 2 cookies to make a profit

David could write a song for the cost of 3 cookies, so he wants to buy a song for LESS than 3 cookies to save

3 cookies > 1 song > 2 cookies

1 song = 2.5 cookies To find how much one

cookie should equal, find the reciprocal of 2.5

1 cookie = 2/5 song

If Ricky writes 4 songs and trades those for cookies, then he can have either 4 songs OR 10 cookies

If David bakes cookies and trades those for songs, then he can have either 6 cookies OR 2.4 songs

Before Trade: After Trade: