Terms of Trade Comparative and Absolute Advantage Opportunity

Terms of Trade Comparative and Absolute Advantage

• Opportunity Cost – the value of the item you give up when a choice is made, the 2 nd best alternative • Absolute Advantage – the ability to produce more than another, given similar resources and technology • Comparative Advantage – having a lower opportunity cost than another producer, therefore you can produce more and benefits to trade exist

Production Possibilities Frontier Graphs demonstrate opportunity Costs and comparative advantage

Fish oc Coconuts CPC 8 8 PPC 4 8 oc

• Practice: • Radios Cameras opportunity cost • • Japan • South Korea Opportunity 2 3 _____ cost 4 1 ______ • Absolute advantage in Radios? • Comparative advantage in Radios? Cameras? • Opportunity cost of Japan producing Cameras?

• Radios Cameras opportunity cost • • Japan • South Korea Opportunity 2 1 _____ cost 4 3 ______ • Absolute advantage in Radios? • Comparative advantage in Radios? Cameras? • Opportunity cost of Japan producing Cameras?

• Radios Cameras opportunity cost • • Japan • South Korea Opportunity 2 1 _____ cost 4 2 ______ • Absolute advantage in Radios? • Comparative advantage in Radios? Cameras? • Opportunity cost of Japan producing Cameras?

• Dairy cost • • Country A • Country B Opportunity _____ Watches opportunity cost ______ ______ • The opportunity cost of making watches is lower in country ? ____ • The opportunity cost of making dairy is lower in country ? ____ • So country B should specialize in ______ and let county A produce _____ • The terms of trade would be somewhere between _____ and _____ pounds of dairy products for 1 watch.

• Soybeans Rice cost • • USA • Japan Opportunity 5 15 _____ opportunity cost 7 10 ______ • Absolute advantage in soybeans? Rice? • Comparative advantage in Soybeans? Rice? • Opportunity cost of USA producing Soybeans?