What was the most importantdocument written in 1776?

What made The Wealth of Nations “THE” most important document written in 1776?

Adam Smith wrote about a pin factory.

What did they call the workers in thepin factory?

Just a bunch of pinheads.

When he first observed the factory, he noticed that each worker wasproducing his or her own pins.

• By the end of the day, the total production by the workers was 20 pins.

He stated that each worker should specialize in the production stage rather than produce his or her own pins.

•Through specialization, the total output by the factory increased to 48,000 pins per day.

(Page 11, Wealth of Nations)

I am going to prove that specializationworks. I am going to name a state andyou tell me what that state specializesin:

Idaho Potatoes

Florida Oranges

Texas Oil or cattle

Michigan Automobiles

Nevada Any illegal activity thatyou can think of

Absolute and Comparative Advantage

Betty types 120 w.p.m. with 0 errorsJim types 60 w.p.m. with 0 errors

Who should do the typing, Betty or Jim?

Betty. Why?

Betty can type ABSOLUTELY faster thanJim can. What type of advantage doesBetty have over Jim?

Absolute Advantage

I forgot to tell you--Betty is a lawyer.

A lawyer earns $60 an hour.

A secretary earns $6 an hour.

A 600-word document has to be typed, how long does it take eachperson to type this document?

Betty is the lawyer. According tothe information given, that makesJim-- A secretary.

How long does it take Betty to typethis document?

How long does it take Jim to typethis document?

5 minutes

10 minutes

600 divided by 120 = 5

600 divided by 60 = 10

How much would it cost each oneto type this 600-word document?

Betty

Jim

$5

$1

Betty receives $60 an hour or $1 per minute. It takes her 5 minutesto type the document.

Jim receives $6 an hour or $1 forevery 10 minutes. It takes him 5 minutes to type the document.

We know that it takes Betty 5 minutesto type the document, and it takes Jim 10 minutes to type the document.

We also know that it costs Betty $5 to type the document, and it costsJim $1 to type the document.

According to this information, whoshould do the typing? Jim

Why should Jim do the typing?

Because he has a--

Comparative Advantage

One entity can produce somethingat a LOWER MARGINAL OPPORTUNITYPRODUCTION COST than anotherentity

Five minutes ago you told me thatBetty should do the typing; now youare telling me that Jim should dothe typing. Why?

Because Jim has the comparativeadvantage.

Which is more important in economics--absolute or comparative advantage?

Comparative Advantage

Take absolute advantage and KICKit out the window. The more important of the two is--

Comparative Advantage

Man-hours required

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

Which country has the absolute advantage in the production of MapleSyrup? In Copper Wire?

Man-hours required

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

What did I tell you to do with AbsoluteAdvantage?Kick it out the window!

Man-hours required to produce 1 unit of a good

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

More importantly, which country hasthe Comparative Advantage in MapleSyrup? In Copper Wire? And Why?

Man-hours required

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

1

1 +

11

+

15

U.S.

2 x2 = 10 Canada

2 2 x = 14

U.S. saves one-man hourCanada saves one-man hours

Man-hours required

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

1

1 +

11

+

15

U.S.

2 x2 = 10 Canada

2 2 x = 14

Should the U.S. keep the 2 barrels of maple syrup and Canada 2 miles of copper wire?

Man-hours required

U.S. Canada

Maple Syrup 5 8

Copper Wire 6 7

1

1 +

11

+

15

U.S.

2 x2 = 10 Canada

2 2 x = 14

No! The U.S. should trade one barrelof maple syrup for one mile of copper wire.