I Can do 8 push-ups. I Can do 42 I Can do 42

push-ups.push-ups.

I have an I have an absolute advantageabsolute advantage in in the production of push-ups.the production of push-ups.

I can clean that I can clean that house in 4 hours.house in 4 hours.

I’m more efficient. I can do the I’m more efficient. I can do the same work in 3 hours so I have same work in 3 hours so I have an an absolute advantageabsolute advantage..

TTexas exas LLonghornonghorn TTexas exas Aggie Aggie

FFuture uture LLonghorn Maidonghorn Maid FFuture uture Aggie MaidAggie Maid

PPC –PPC – before trade & specialization– prisoners of their own PPC’s and CPC’s

CCOOFFFFEEEE

BreadBread

8080

2020

PPCPPCCPCCPC

Before trade, I’m a prisoner of my own PPC.Before trade, I’m a prisoner of my own PPC.

HaitiHaiti4040 [Consumption Possibilities Curve][Consumption Possibilities Curve]

101000

Haiti’s DHaiti’s Domestic omestic CComparativeomparative C Costost

1 Bread = 4 Coffees1 Bread = 4 Coffees¼ Bread = 1 Coffee¼ Bread = 1 Coffee

Haiti’s DCCHaiti’s DCC Cuba’s DCCCuba’s DCC1B1B = __ C = __ C 1B = __ 1B = __ CC__ B = __ B = 1C1C __ B = __ B = 1C1C

ComparativeComparative and and AbsoluteAbsolute AdvantageAdvantage[CComparative omparative AAdvantagedvantage can produce at a lower productive opportunity can produce at a lower productive opportunity

costcost]]

44 661/41/4 1/61/6

100100

1818

“Do what you do best & trade for the rest.”

Absolute AdvantageAbsolute Advantage - more efficient, can produce more with the same number of inputs [who can do the most in absolute numbers]

““Export”Export” what it can producewhat it can produce at a lower relative priceat a lower relative price and “import”“import” goods it can buy at a lower relative pricegoods it can buy at a lower relative price ..

1. (Haiti/Cuba) has an absolute advantage in coffeeabsolute advantage in coffee and (Haiti/Cuba) has an absolute advantage in breadabsolute advantage in bread..2. HaitiHaiti will exportexport (bread/coffee) [[comparative advantagecomparative advantage]] and importimport (bread/coffee). [[comparative comparative disadvantagedisadvantage]] & CubaCuba will exportexport (bread/coffee) & importimport (bread/coffee).3. Mutually advantageous tradeadvantageous trade can occur between Haiti & Cuba when 1 bread1 bread is exchanged for (3/5/7) tons of coffeetons of coffee. Production in both is subject to (increasing/constant) opportunity costs.

““Trade is the free lunch of economics.”Trade is the free lunch of economics.”

TermsTerms of of TradeTrade1 1 breadbread = __ = __coffeescoffees

World CCWorld CC 11 BreadBread=__ Coffees=__ Coffees

__ Bread=1 Coffee__ Bread=1 Coffee55

55

11//55

8080

oo 2020

9090

00 1515

HaitiHaiti CubaCuba

“A prisoner of my own PPC.”

BreadBread BreadBread

Coff

ee

Coff

ee

Coff

ee

Coff

ee

““I can consume I can consume only on my PPC.”only on my PPC.”

Trade Allows Nations to Consume Beyond Trade Allows Nations to Consume Beyond Their PPCs While Producing On ItTheir PPCs While Producing On It

10 breads & 50 coffees10 breads & 50 coffees

12 breads & 40 coffees12 breads & 40 coffees

5050

1010 2020

We are suspending reality.We are suspending reality.CPCCPC (after trade) (after trade)

CPCCPC (before trade)(before trade)

PPCPPC (before & after trade) (before & after trade)

100100

8080

4040

Coff

ee

Coff

ee

00

11 breads and 45 coffees11 breads and 45 coffees

10 breads and 40 coffees10 breads and 40 coffees

BreadBread

“Now with trade, you can escape your PPC and consume more of both bread and coffee.”

4545

““I’m outaI’m outahere.”here.”

Brazil’s DCCBrazil’s DCC Chile’s DCCChile’s DCC1 W = __ S 1 W = __ S___W = 1S ___W = 1S

4. ChileChile has a comparative advantagecomparative advantage in (wheat/steel) & an absolute advantageabsolute advantage in (wheat/steel/both). BrazilBrazil has a comparative advantagecomparative advantage in (wheat/steel).5. The opportunity cost of one unit of wheat foropportunity cost of one unit of wheat for ChileChile is (2/4/6) units of steel. The opportunity cost of one unit of steel for Brazilopportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat.6. If the 2 countries trade, ChileChile would exportexport (wheat/steel) & import (wheat/steel). If the 2 countries traded, BrazilBrazil would exportexport (wheat/steel) & import (wheat/steel).

44 22¼¼ ½½

3030

44

Terms of TradeTerms of Trade1 1 WWheatheat== ___ ___ SteelsSteels33

World CCWorld CC1 1 Wheat Wheat == __ __ SteelsSteels

__ __ Wheat = 1 SteelWheat = 1 Steel11//33 33

1212

00 33

2020

00 1010

BrazilBrazil ChileChile

Ste

el

Ste

el

Ste

el

Wheat Wheat

DCC DCC for for U.S.U.S. DCC DCC for for BrazilBrazil1 H = __ B 1 H = __ B___H = 1B ___ H = 1B

8. BrazilBrazil has a comparative advantagehas a comparative advantage in (bread/ham) and a comparative disadvantagecomparative disadvantage in (bread/ham).9. The opportunity cost of producing 1 unitopportunity cost of producing 1 unit of ham of ham for thefor the U.S. U.S. is (10/12/14) breads. 10. Acceptable terms of tradeterms of trade might be 1 ham for (8/12/16) breads.

14141/141/14 1/101/10

7070

00 55

4040

4400HamHam HamHam

Bre

ad

Bre

ad

Bre

ad

Bre

ad

Terms of TradeTerms of Trade1 Ham = __ Bread

1010

1212

BrazilBrazil

FroggyFroggy AA BB CC DD EE DCC: FroggyDCC: Froggy WoggyWoggy AA BB CC DD EE DCC: WoggyDCC: WoggyPorkPork(tons) 4 3 2 1 0 1P = __ B PorkPork(tons) 8 6 4 2 0 1P = __ B BeansBeans(tons) 0 5 10 15 20 __ P = 1B BeansBeans(tons) 0 6 12 18 24 __ P = 1B

Terms of TradeTerms of Trade1 1 Pork Pork == __ __ BeansBeans

15. Production in both countries is subject to (increasing/constant) opportunity costopportunity cost.16. If these 2 nations specialize in accordance with comparative advantagecomparative advantage, FroggyFroggy will produce (pork/beans) & WoggyWoggy will produce (pork/beans).17. In FroggyFroggy, the opportunity cost of 1 pork1 pork is (1/5 or 5 or 3) beans’18. Assume that prior to specialization & trade, Froggy produced combo “C”Froggy produced combo “C” and Woggy produced “B”Woggy produced “B”. If these 2 nations now specialize according to comparativecomparative advantageadvantage, the total gainstotal gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork.19. Feasible terms of tradeterms of trade would be (1/6/4) ton of porkpork for (1/6/4) tons of beansbeans.

551/51/5

331/31/3

44

24. If trade occurs, DoggyDoggy will exportexport (soup/peanuts) and importimport (soup/peanuts).

WoggyWoggy will exportexport (soup/peanuts) and importimport (soup/peanuts). 25. For DoggyDoggy, the opportunity cost of 1 soupopportunity cost of 1 soup is (1/2/3) peanuts. For WoggyWoggy, the opportunity cost of 1 soupopportunity cost of 1 soup is (1/2/3) peanuts.26. Prior to specialization, Doggy & Woggy chose combinationDoggy & Woggy chose combination “C”“C”.. Now each specializes according to comparative advantagecomparative advantage. The gainsgains from tradefrom trade will be (0/20/40) units of soupsoup & (0/20/40) units of peanutspeanuts.

DoggyDoggy AA BB CC D D EE DCC: DoggyDCC: Doggy WoggyWoggy A B C D E DCC: WoggyDCC: WoggySoupSoup 60 45 30 15 0 1S = __ P SoupSoup 20 15 10 5 0 1S = __ PPPeanutseanuts 0 15 30 45 60 Peanutsnuts 0 15 30 45 60 __ S = 1P

11 331/31/3

60606060

Terms of TradeTerms of Trade 1 1 Soup =Soup = __ __ PeanutsPeanuts22

FuzzyFuzzy A A BB C C D D EE FF DCC: DCC: FuzzyFuzzy WuzzyWuzzy A A B B CC DD EE FF DCCDCC:: Wuzzy WuzzyPlumsPlums 1500 1200 900 600 300 0 1G = __ P PlumsPlums 3500 2500 1500 1000 500 0 1G = __ PGrapesGrapes 0 100 200 300 400 500 __ G = 1P GrapesGrapes 0 150 300 450 575 700__ G = 1P

Terms of TradeTerms of Trade

1 1 Grape = __ PlumsGrape = __ Plums

1/31/3 55

1/51/5

11. In WuzzyWuzzy, the opportunity cost of 1 grapeopportunity cost of 1 grape is (1/2/3/4/5) plums.12. FuzzyFuzzy has a comparative advantagecomparative advantage in & should produce (plums/grapes).13. The terms of tradeterms of trade will be 1 grape1 grape for somewhere between (3&5/2&6) plums.14. Assume that if Fuzzy did not specialize it would produceFuzzy did not specialize it would produce combo “combo “CC”” and ifand if WuzzyWuzzy did not specialize it would produce combo “did not specialize it would produce combo “BB””. The gainsgains from from specializationspecialization and tradeand trade are: (0/100/150) plums and (0/100/150) grapes.15. Mutual termsterms of of tradetrade between FuzzyFuzzy and WuzzyWuzzy would be 1 grape1 grape for (2/4/6/8) plum.

44

33

The countries of:The countries of:

““FFuzzuzzy”y” andand “W“Wuzzuzzy”y”

Djibouti Djibouti DCCDCC: Djibouti: Djibouti CanadaCanada DCCDCC: : CanadaCanadaFish 10 hours 1W =__F Fish 20 hours 1 W = __ FWheat 20 hours ___ W=1F Wheat 60 hours ___W = 1F

Terms of Trade: Terms of Trade: 1 1 Wheat Wheat == __ __ FishFish

[lower # of hours gives absolute advantage][lower # of hours gives absolute advantage]

221/21/2

331/3 1/3

22..5 5

27. (Djibouti/Canada) has an absolute advantage in bothabsolute advantage in both commodities.

(Djibouti/Canada) has a comparative advantagecomparative advantage in in producing wheatproducing wheat.28. (Djibouti/Canada) has an absolute disadvantage in bothabsolute disadvantage in both, but a comparative advantage in fishcomparative advantage in fish.29. Advantageous tradeAdvantageous trade can occur between the two when 1 wheat is exchanged1 wheat is exchanged for (1/2.5/3) fish.

We are going togoing to turn inputs into outputsturn inputs into outputs.In 20 hours20 hours, DjiboutiDjibouti can produce an output of 1 wheatoutput of 1 wheat or or 2 fish2 fish.In 60 hours60 hours, CanadaCanada can produce an output of 1 wheat or 3 fishoutput of 1 wheat or 3 fish.

DCC: U.S.DCC: U.S. Russia Russia DCC:DCC: R RussiaussiaCaviar 6 hours 1C = __W Caviar 16 hours 1C = __ WWheat 3 hours __ C =1W Wheat 4 hours __ C = 1W

30. (Russia/U.S.) has an absolute disadvantageabsolute disadvantage in bothin both commodities commodities. (Russia/U.S.) has a comparative advantage in wheatcomparative advantage in wheat.31. (Russia/U.S) has an absolute advantage in both commoditiesabsolute advantage in both commodities. (Russia/U.S.) has a comparative advantage in caviarcomparative advantage in caviar.31. Advantageous tradeAdvantageous trade can occur between the two nations when 1 caviar is exchanged1 caviar is exchanged for (1/3/5) tons of wheattons of wheat.

[lower # of hours gives absolute advantage]

221/21/2

441/41/4

Terms of TradeTerms of Trade 1 1 Caviar Caviar = __ = __ WheatsWheats33

We are once again turning inputs into outputsturning inputs into outputs.In 6 hours6 hours, the the U.S.A.U.S.A. can produce an outputoutput of of 1 1 caviarcaviar or 2 or 2 wheatswheats.

In 16 16 hourshours, RRussiaussia can produce an outputoutput of of 1 caviar1 caviar or or 4 wheats4 wheats.

And with inputsinputs (hourshours), the smaller numbersmaller number indicates absoluteabsolute advantageadvantage; that country is more efficientmore efficient because it can produce a good absolutelyabsolutely fasterfaster than the otherthan the other with the same inputs.

Absolute Advantage [Absolute Advantage [OutputsOutputs v.v. InputsInputs]

Remember that with outputsoutputs or quantityquantity, the largerlarger numbernumber indicates absolute advantageabsolute advantage; that country can produce absolutelyabsolutely moremore with the same inputs, and is more efficient.

ProductProductMarketMarket

ResourceResourceMarketMarket

22ndnd M Most ost MMissed issed QQuestion On uestion On 95 AP E95 AP Exam [26% correct]xam [26% correct]

Country Food Clothing DuckyDucky 20 hours 20 hours 50 hours50 hours

WuckyWucky 10 hours10 hours 20 hours20 hours

a. DuckyDucky has a comparative advantage in the production of both food and clothing. b. WuckyWucky has a comparative advantage in the production of both food and clothing.c. DuckyDucky has a comparative advantage in food production, & WWuckyucky has a comparative advantage in clothing production.d. DuckyDucky has a comparative advantage in clothing production, & WuckyWucky has a comparative advantage in food production.e. Neither country has a comparative advantage in the

production of either good.CountryCountry FoodFood ClothingClothingDucky 20 hrs 50 hrsDucky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F 1C = 2.5F; .4C = 1FWucky 10 hrs 20 hrs Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F 1C = 2F; .5C = 1F

Terms of Trade might be 1C = 2.2FTerms of Trade might be 1C = 2.2F

DuckyDucky WuckyWucky

Product Market Product Market [outputs][outputs]

CountryCountry GunsGuns ButterButterRabbit Rabbit 20 20 unitsunits 6060 units units

WabbitWabbit 10 10 unitsunits 2020 units units

Resource MarketResource Market [inputs][inputs]

CountryCountry GunsGuns ButterButterRabbit Rabbit 2020 hours hours 6060 hours hours

WabbitWabbit 1010 hours hours 2020 hours hours

WWhathat country has ancountry has an absolute absoluteadvantage in advantage in gunsguns??

WWhat country has anhat country has an absolute absoluteadvantage inadvantage in gunsguns??RabbitRabbit WabbitWabbit

Why does Why does RabbitRabbit have an have an absolute advantageabsolute advantage in in gunsguns??

Why does Why does WabbitWabbit have an have an absolute advantageabsolute advantage in in gunsguns??

RabbitRabbit can produce can produce absolutelyabsolutelymore gunsmore guns than than WabbitWabbit [[20 units20 units v. v. 10 units10 units]]

WabbitWabbit can can produce guns produce guns absolutely fasterabsolutely faster thanthan Rabbit Rabbit [[10 hours10 hours v. v. 20 hours20 hours]]

RabbitRabbit

WWhat country has ahat country has a comparativecomparativeadvantage in advantage in gunsguns??

WWhat country has ahat country has a comparativecomparativeadvantage in advantage in gunsguns??WabbitWabbit RabbitRabbit

WabbitWabbit can produce guns at a lower can produce guns at a loweropportunityopportunity cost cost [[2 butters2 butters v. v. 3 butters3 butters]]

RabbitRabbit can produce guns at a lower can produce guns at a loweropportunityopportunity cost [ cost [1/3 butter1/3 butter v. v. 1/2 butter1/2 butter]]

RabbitRabbit1 G = 3 B1 G = 3 B1/3 1/3 G=1BG=1B

WabbitWabbit1 G = 2 B1 G = 2 B1/21/2 G=1B G=1B

RabbitRabbit1 B = 3 G1 B = 3 G1/31/3 B=1G B=1G

WabbitWabbit1 B = 2 G1 B = 2 G1/21/2 B=1G B=1GWabbitWabbit RabbitRabbit WabbitWabbit

““Let’s change inputs into outputs.”Let’s change inputs into outputs.”