Comparative Advantage and Globalization

Explain?

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Comparative Advantage and Globalization

• BIG IDEA – When regions and nations use comparative advantage to produce at the lowest cost and then trade with others,……………increase.

• Interdependence• Production• Consumption • Choices • Standard of Living = Trade is Good

Absolute Advantage• Absolute advantage occurs when a country (or person)

can produce more of a good given the same resources (inputs)

• Ex’s : Bob has the absolute advantage if……• Bob can produce 3 meals in 1 hour • Brenda can produce…?... meals in 1 hour • 1 or 2 • Defined another way: ……when a country (or person) can

produce the same amount with less resources (inputs) • Ex’s: Brenda has the absolute advantage if…..• Brenda can produce 1 clay vase in 1 day• Bob can produce 1 clay vase in …?• 2 or more days• Describe a Trade Scenario that makes sense to you:

To Trade or Not To Trade???...That is the QuestionWhat if:• Bob can produce 4 meals in 1 hour • Brenda can produce 1 meal in 1 hour

• Bob can produce 2 clay vases in 1 hour • Brenda can produce 1 clay vase in 1 hour• Absolute Advantage? • Bob has it in both• Should they trade?

• YES!!!!!!

COMPARATIVE ADVANTAGE

• Comparative advantage of regions and nations exists when they can produce goods or services at a ….

• lower opportunity cost than other individuals or nations.

• Given the choice of producing one good or another, it is MORE EFFICIENT to produce the good with the lower opportunity cost

• Specialization in the production of the good or service at a lower cost increases trade with others

• Discuss / Give ex’s of SPECIALIZATION

Why does COMPARATIVE ADVANTAGE exist? What creates a lower opportunity cost of production? • Countries have different ……• natural, human, and capital resources

• Countries have different ways of combining these resources = not all countries are equally EFFICIENT at producing the goods and services that their residents demand

• Given the choice of producing one good or another, it is more efficient to produce the good with the lower opportunity cost

• This allows a nation to increase production of that good and then trade for the good with the higher opportunity cost

• Bob can produce 4 meals in 1 hour • Brenda can produce 1 meal in 1 hour

• Bob can produce 2 clay vases in 1 hour • Brenda can produce 1 clay vase in 1 hour• Absolute Advantage? = Bob for both meals and

vases• Comaparative Advantage? = • Need to find lower opp. cost for the production of

each good

Find Lower O.C. Meals• Bob can produce 4 meals in 1 hour • Brenda can produce 1 meal in 1 hour • Bob can produce 2 clay vases in 1 hour • Brenda can produce 1 clay vase in 1 hour

• Bob’s oc of 1 meal = 2vases / 4 meals = ½ vase • Brenda’s oc of 1 meal = 1 vase / 1 meal = 1 vase • Bob has the lower oc of producing meals • Bob should specialize in the production of meals and

trade for the vases he needs • Bob has the COMPARATIVE ADVANTAGE IN MEALS

Find Lower O.C of Vases• Bob can produce 4 meals in 1 hour • Brenda can produce 1 meal in 1 hour • Bob can produce 2 clay vases in 1 hour • Brenda can produce 1 clay vase in 1 hour

• Bob’s oc of 1 vase = 4 meals / 2 vases = 2 meals• Brenda’s oc of 1 vase = 1 meal / 1 vase = 1 meal • Brenda has the lower oc of producing vases• Brenda should specialize in the production of vases

and trade for the meals needed• Brenda has the Comparative Advantage in vases

Unit 4 Practice • Alpha and Omega a. Total production of each good (no trade) Alpha 75 popcorn + omega 150 popcorn = 225

popcorn Alpha 125 pnt + omega 50 pnt = 175 pnt. b. Absolute adv in pnt = Alpha (250 vs. 100) c. – d. Alphas oc of 1 popcorn = 250/150 = 1.6 pnt

e. Comp adv for popcorn - We know Alphas oc of popcorn = 1.6 pnt- Omegas oc of popcorn = 100/300 = 1/3 pnt - So comp adv for popcorn…- omega has lower oc of producing popcorn so

they have comp adv. In popcornf. Trade 100 popcorn for 100 pnt Omega will make 300 popcorn and trade 100

popcorn and get 100 pnt. ( end with 200 popcorn and 100 pnt.) ….so what?

Look at ppf – could they have 200 popcorn and 100 pnt on their own?

Alpha will make 250 pnt, trade 100 pnt and get 100 popcorn (end with 150 pnt and 100 popcorn) …so ??

Look at ppf – could they have 100 popcorn and 150 pnt on their own?

g. Compare total world production before / after trade

Total production of each good (no trade) Alpha 75 popcorn + omega 150 popcorn = 225

popcorn Alpha 125 pnt + omega 50 pnt = 175 pnt.After trade: Alpha makes – 250 pnt. Omega makes – 300 popcorn

Jim 4 mugs / day 4 plates / day Joe 9 mugs/day 18 plates /day a. b. - Absolute adv. = Joe for both mugs and

plates Does this tell us anything about trade?

c. Jims oc of 1 plate 4 mugs/4 plates = 1 mug d. Joes oc of 1 mug 18 plates/9 mugs = 2 plates

e. Comp adv in plates? We know : Jims oc of 1 plate 4 mugs/4 plates = 1 mugWhat do we need to find out? Joes oc of 1 plate = 9mugs/18 plates = ½ mug

Joe has lower oc of producing plates = comp adv in plates

f. Who should specialize in production of mugs?We know joe should make plates…So jim should make mugs ….. Prove it

We know Joes oc of 1 mug from part d. 18 plates/9 mugs = 2 plates Jims oc of 1 mug = 1 plate Jim has lower oc of producing mugs = comp adv

in mugs