CH. 6 COMPARATIVE ADVANTAGE

TRADE FLOWS VS. RESOURCE FLOWS Trade Flows: The flow of goods and services between the US and other nations Example: The US exports and imports goods and services to/from other nations Resource Flows: The flow of capital and labor between countries Example: The US creates production facilities in other nations and people immigrate/emigrate all over the world for work

FUN FACTS! The world as a whole has experienced an increase in the volume of international trade (relative to everyone’s GDPs) GDP = Gross Domestic Product In 1947 the US supplied about 1/3 of the world’s total exports, but today it supplies 1/8 th of the world’s exports The US is the leading trading nation in terms of absolute volumes of imports and exports!

In 1999, the US, Germany and Japan were the top exporters in the world They made a collective total of $1.6 trillion in exports

MULTINATIONAL CORPORATIONS Definition: Businesses that have production and distribution activities in other countries Ex: Coca-Cola (US), Nestle (Switzerland), & Mitsubishi (Japan)

COMPARATIVE ADVANTAGE Mr. Clifford KHAN Academy

COMPARATIVE ADVANTAGE Definition: The ability to enact an economic activity more efficiently than a competitor (ex: make a specific product) Comparative vs. Absolute Advantage Comparative = advantage in one category over another country (“Country A can make more X than Country B, but it can’t make more Y than Country B”) Absolute = advantage in all categories (“Country A can make both X and Y more efficiently than Country B”)

OUTPUT VS. INPUT Mr. Clifford Definition: Inputs are factors of production (land, labor, capital and entrepreneurship) and output is the final good or service produced

WHITEBOARDS! What does the graph of this chart look like?

TADA!

PROBLEM # 2 Assume that Jay and Leah can spend the day either washing cars or mowing lawns. For example, Jay could wash 20 cars or mow 5 lawns in one day. ______________________________________________ Jay Leah ______________________________________________ Cars washed Lawns mowed 5 3 ______________________________________________ Note: Jay has the absolute advantage in both goods. This does not mean that he has comparative advantage. Even though he is “better” at producing both goods than Leah, he can still benefit from trading with her.

PART 1 1) Calculate the Opportunity Costs for both people Jay: The opportunity cost of mowing 5 lawns is washing 20 cars.  the opportunity cost of mowing 1 lawn is washing 4 cars.  the opportunity cost of washing 1 car is mowing ¼ of a lawn. Leah: The opportunity cost of mowing 3 lawns is washing 15 cars.  the opportunity cost of mowing 1 lawn is washing 5 cars.  the opportunity cost of washing 1 car is mowing 1/5 of a lawn.

PART 2 Jay has a lower opportunity cost for mowing lawns so he has the comparative advantage in lawns (he gives up only 4 cars per lawn while Leah gives up 5 cars). Leah has a lower opportunity cost for washing cars so she has the comparative advantage in cars (she gives up only 1/5 of a lawn per car while Jay gives up ¼ of a lawn).  Jay should specialize in mowing lawns and Leah should specialize in washing cars.