Absolute and Comparative Advantage and TRADE Absolute advantage

Absolute and Comparative Advantage, and TRADE

Absolute advantage • One nation can produce more output with the same resources as the other

Comparative advantage • One nation can produce a good at a lower opportunity cost than the other

Examples of comparative advantage • Lawyer and secretary • Doctor and nurse

INPUT METHOD • A COMPARISON OF THE OPPORTUNITY COST OF THE RESOURCES EMPLOYED TO PRODUCE THE SAME OUTPUT OF DIFFERENT GOODS OR SERVICES

INPUT: UNDER TY Jessica Mow a lawn 60 minutes Trim a lawn 40 minutes 75 minutes 90 minutes

The opportunity cost of producing the other good Is Always The Reciprocal

Save Time: It’s Always The Reciprocal! • If Ty’s cost to mow a lawn is 3/2’s trimmed lawns; then Ty’s cost to trim a lawn is 2/3’s mowed lawns • If Jessica’s cost to mow a lawn is 5/6’s trimmed lawns; then Jessica’s cost to trim a lawn is 6/5’s mowed lawns

OUTPUT METHOD • A COMPARISON OF THE OPPORTUNITY COST OF THE PRODUCTIVITY (OR OUTPUT) OF DIFFERENT GOODS OR SERVICES, USING THE SAME RESOURCES • ie: output per hour, or per acre

Adjust the paradigm

OUTPUT: OVER Radios Speakers Mark 6 2 Doreen 10 5

Determining comparative advantage (output method) (over) CDs Pounds of beef Japan 4 2 Canada 4 6 1. Which nation has a absolute an advantage in producing CD’s? 2. Which nation has a absolute an advantage in producing beef? 3. Which nation has a comparative advantage in producing CD’s? 4. Which nation has a comparative advantage in producing beef? 5. Should Japan specialize in CD’s or beef? 6. Should Canada specialize in CD’s or beef?