Module 4-”Comparative Advantage and Trade” By. J.A.SACCO.

Module 4-”Comparative

Advantage and Trade”

By. J.A.SACCO

Absolute and Comparative Advantage

O Countries/Individuals trade to maximize production- specialization is the KEY!

Absolute Advantage- One nation can produce more output with the same quantity of inputs (factors of production) as the other.

Comparative Advantage- One nation can produce a good at a lower opportunity cost than the other- determines how countries specialize.

Example- Babe Ruth?

Determining Comparative Advantage

(OUTPUT METHOD)O Over a given period of time- Ex: tons

per acre, miles per gallon, words per minute, apples per tree.

O In order to find comparative advantage is to find who has the lowest opportunity cost.

O The following chart illustrates the number of CD’s and pounds of beef that can be produced in one hour.

Determining Comparative Advantage(OUTPUT METHOD)

CD’s BeefJapan 4 2Canada 4 6

Comparative Advantage To find the opportunity cost for “A”,

divide “B” by “A”. To find the opportunity cost for

“B” ,divide “A” by “B” .

LOWER IS BETTER!


1. Which nation has an absolute advantage in producing CD’s?

2. Which nation has an absolute advantage in producing beef?

3. Which has a comparative advantage in CD’s?

4. Which has a comparative advantage in beef?

5. Should Japan specialize in CD’s or beef?

6. Should Canada specialize in CD’s or beef?


1, Which nation has an absolute advantage in producing CD’s? Japan and Canada2. Which nation has an absolute advantage in producing beef?Canada3. Which has a comparative advantage in CD’s?Japan4. Which has a comparative advantage in beef?Canada5. Should Japan specialize in CD’s or beef?CD’s6. Should Canada specialize in CD’s or beef?Beef

CD’sBeef

Japan 4 2Canada 4 6* To produce 1 ___, your opportunity cost is ___.

Determining Comparative Advantage(INPUT METHOD)

O Inputs (usually time) to complete an activity. Ex:# of hours to do a job, #of gallons of paint to paint a house, #of acres to feed a horse

O The key again is to find the lowest opportunity cost

O The following chart illustrates the number of hours it takes to produce one loaf of bread and one bushel of corn


Hrs/1Bread Hrs/1 CornU.S. 4 2France 4 6 For absolute advantage in input method

lower # of inputs used is better. To find the opportunity cost for “A”,

divide “A” by “B”. To find the opportunity cost for

“B” ,divide “B” by “A”. For comparative advantage in input

method, lower is better!


1. Which nation has an absolute advantage in producing bread?

2. Which nation has an absolute advantage in producing corn?

3. Which has a comparative advantage in bread?

4. Which has a comparative advantage in corn?


Hrs/1Bread Hrs/1CornU.S. 4 2France 4 6

*To produce 1 ____, your opportunity cost is ____.

1. Which nation has an absolute advantage in producing bread? France/U.S.2. Which nation has an absolute advantage in producing corn? U.S.3. Which has a comparative advantage in bread? France4. Which has a comparative advantage in corn? U.S.

Note in either the output method or the input method, you can never have a comparative advantage in both goods.

1. Calculate the opportunity costs of production for each country2. Determine the comparative advantage for each country

Production Possibilities for Two Countries

Cotton ShirtsMalaria

Medicine

Bangladesh

United States


The United States has a comparative advantage in Malaria Medicine (M) because they only give up 1 cotton shirt while Bangladesh must give up 3 cotton shirts to gain 1 unit of medicine.

Bangladesh has a comparative advantage in Cotton Shirts (C) because they only give up 1/3 unit of medicine while The United States must give up 1 unit of medicine to gain 1 cotton shirt.


Cotton Shirts

Malaria Medicine

Bangladesh

750C = 250M1C = 1/3M

250M = 750C1M = 3C

United States

1000C =1000M1C = 1M

1000M =1000C1M = 1C

Module 4-”Comparative Advantage and Trade” By. J.A.SACCO.

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Transcript of Module 4-”Comparative Advantage and Trade” By. J.A.SACCO.