384c4d6af02d4854d26d450c2b51b1e5_chap 2 f 13.pptx

8/9/2019 384c4d6af02d4854d26d450c2b51b1e5_Chap 2 f 13.pptx

1/13

Comparative Advantage


2/13

What the Economy Does

Basic questions

What?

How?

For Whom?

Resource categories

Land natural resources limited in quantity

Labor-Human power Capital-created resources

ntrepreneurial talent-business s!ills


3/13

3

Comparative Advantage &

the Production Possibilities Frontier

Absolute AdvantageAbility to produce at less cost

Comparative Advantage Relati"eAbility to produce at less cost

ased upon !pportunity Cost "#hat$s given

up%

eason 'or trade

eason 'or speciali(ation


4/13

)

Production Possibilities CurveE*ample

+,-,

Ag .'g/ 0///

1/ 1//

02/ 2//

)/ )//

3/ //

)// /

Entries are combinations of maximum total output of goods in

the countryAdding80 units Ag in the US requires giving up200units of Mfg. ostAg! """""""" ! """""" Mfg#Ag$he opportunity cost of

Ag %&Ag'200#80

2.(

.e*

Ag .'g/ 0//

)/ 1/

1/ 2/

0/ )/

02/ /

// /

Canada

Ag .'g/ )//

2/ 3/

0/ )/

01/ 02/

)/ 1/

3// /

Plot each box of options on the Graph Below (3 lines)


5/13

0 )00 200 *00 +00 (00 ,00 -00 800 000

200

+00

,00

800

)000

)200

)+00

Production Possibilities Curve

US

anada

Mexico

Agriculture

Manufacturing

4

United tatesPPC

CanadaPPC

MexicoPPC

%0/)000'

%80/800'


6/13

2

pportunity ostalculations What is the opportunity cost o' ag goods in each

country5 m'g goods given up per aggood produced

!p cost o' Ag in +- 666666666666

!p cost o' Ag in .e*ico 666666666666 !p cost o' Ag in Canada 66666666666

Who has lo#est op cost "P%o' Ag 66666666

Who has comparative advantage "lo# cost% inmanu'acturing56666666666

7ence #ho should produce #hat i' some o' each isdesired5

+-66666666 .e*ico 6666666 Canada 666666

%)0001800'#8010' ! 2.( Mfg#Ag

%801,0'#%801+0'!0.( Mfg#Ag+00#*00 !).* Mfg#Ag

Mexico

US

Mfg Ag Either


7/13

8

raphs Maximum utputptions

9!A:; 9raph total o' the three countries First< complete speciali(ation in m'g goods

-econd< let only low cost producero' ag gds

speciali(e in ag gds "country666666666%

=hird let only low cost producero' m'g gds

produce m'g goods, "country 666666666%

!ther t#o produce ag gds 666666666666666 :ast all three countries speciali(e in m'g gds,

Mexico

U.S.

anada and Mexico


8/13

0 )00 200 *00 +00 (00 ,00 -00 800 000

200

+00

,00

800

)000

)200

)+00

Production Possibilities Curve

US

anada

Agriculture

Manufacturing

1

). 3a4e Mexico %lo5 costproducer' produce Ag

goods 2. Add anada %medium costproducer' producing Aggoods

Add US %high costproducer' producing Aggoods

Conclusion! Co"parative advantage causes the outward bow inthe #orld PPC


9/13

1+ ) , )) ), 2) 2, *) *,0

(

)0

)(

20

2(

*0

Susan 2+c#)2n

$om ,c#2+n

Speciali6ed

7o Speciali6ation&oorly speciali6ed

oo9 Example7umbers changed to ma9e learer

#hirley $% C

&om $% '

#hirley ($'

&om ) C

Each produces

proportionalshare

-hirley


10/13

0/

&roduction &ossibilitiesur4e

Mil9

omputers

:ne;cient

E;cient

Unattainable

$ncreasing %pportunit& Cost


11/13

00

&& Shift >actors

hanges in =esources apital


12/13

Application of omparati4eAd4antage

Sell#Export 5hat you ha4e a comparati4e ad4antagein

uy#:mport goods you ha4e a comparati4edisad4antage in

Should you gro5 your o5n foodD

Should you do your o5n D Ans5erF $t depends on opportunit& cost

:ncludes non1monetary elements

$rade a?ects di?erent indi4iduals#Brms di?erently :mport competitor hurt

onsumer of imports beneBts from lo5er cost

onsumer of exported good pays higher prices


13/13

Chy#Chy 7ot Speciali6eD

&ro More output possible E;ciently using resources

384c4d6af02d4854d26d450c2b51b1e5_chap 2 f 13.pptx

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