Standard 3 Understand the fundamental concepts and interrelationships of the United States economy in the international marketplace SS.912.E.3.2 Examine absolute and comparative advantage, and explain why most trade occurs because of comparative advantage

Absolute vs Comparative Advantage Absolute advantage- a situation in which a nation, region, or individual can produce more of a good with the same amount of resources than another nation, region, or individual Comparative advantage- the ability to produce a good at a lower opportunity cost than others can produce it; relative costs determine comparative advantage

“Rules:” (1) Make and trade away the good for which you have a comparative advantage (2) Trade for (receive) the good for which you don’t have a comparative advantage

Comparative advantage is the foundation for trade because different opportunity costs create gains from trade Why produce something yourself when someone else can do it cheaper?

Economics is Everywhere, 2nd ed., Daniel Hamermesh My wife and I needed to move 40 pieces of fencing, all with nails in them, from behind the house out to the street, and the nails had to be removed before the trash collectors would take the fencing. How to organize the task? There are three activities: dragging the wood, pounding the nails with a hammer so the heads stick up, and pulling the nails out with pliers. We figured that I have an absolute advantage in all three activities, but my wife probably had a comparative advantage in using the hammer. To minimize time spent on the activity, I dragged the wood, she hammered, and I plied. As the morning progressed, we each got faster at our tasks. By the end of the task, she may have developed an absolute advantage at hammering, so that our technological improvements increased each of our comparative advantages in the three tasks.

How do you know if you have a comparative advantage? You have a comparative advantage if you have a lower opportunity cost than someone else.

Units of Output per Worker Day An Example: Units of Output per Worker Day U.S. Japan Food 4 3 Clothing 12 6 Who has the lowest opportunity cost for each good?

Units of Output per Worker Day U.S. Japan Food 4 3 Clothing 12 6

Focus: Understanding Economics in US History Lesson 6 Specialization and Trade in the Thirteen Colonies