Comparative advantage and Gains from Trade

CA vs. AA Absolute advantage Can produce the most output Utilizes fewest inputs Comparative advantage Has the lowest opportunity cost

WB p. 287, #2 Henry 4 6 John 24 12 Deer Antelope Number caught per day: Deer Antelope Henry 4 6 John 24 12 Output problem: OOO – Output: Other goes Over Who has the absolute advantage in catching deer: Who has the absolute advantage in catching antelope: Who has the comparative advantage in catching deer: Who has the comparative advantage in catching antelope:

WB p. 287, #2 Number caught per day: Deer Antelope Henry 4 6/4 = 1.5 6 4/6 = .67 John 24 12/24 = .5 12 24/12 = 2 Output problem: OOO – Output: Other goes Over Who has the absolute advantage in catching deer: John Who has the absolute advantage in catching antelope: John Who has the comparative advantage in catching deer: John Who has the comparative advantage in catching antelope: Henry

WB p. 287, #3 XYZ Corp. 8 10 QKFX Corp. 15 12 Cars Planes Days to produce one unit of each Cars Planes XYZ Corp. 8 10 QKFX Corp. 15 12 Input problem: IOU – Input: Other goes Under Who has the absolute advantage in producing cars: Who has the absolute advantage in producing planes: Who has the comparative advantage in producing cars: Who has the comparative advantage in producing plans:

WB p. 287, #3 XYZ Corp. 8 8/10 = .80 10 10/8 = 1.25 QKFX Corp. Days to produce one unit of each Cars Planes XYZ Corp. 8 8/10 = .80 10 10/8 = 1.25 QKFX Corp. 15 15/12 = 1.25 12 12/15 = .80 Input problem: IOU – Input: Other goes Under Who has the absolute advantage in producing cars: XYZ Corp Who has the absolute advantage in producing planes: XYZ Corp Who has the comparative advantage in producing cars: XYZ Corp Who has the comparative advantage in producing plans: QKFX Corp

WB p. 290 #1 Complete A - G

WB p. 290 #1 Part (H) Terms of trade = 1 ton of oats for 1 bagpipe Production period = 60 hours Before specialization Scotland produces: 7.5 tons of oats 6 bagpipes After specialization and trade with the US, Scotland wants to maintain 6 bagpipes How many tons of oats will it have? What are it’s gains from trade?

WB p. 290 #1 In 4 hours, Scotland can produce 1 ton of oats If the production period is 60 hours, how many tons of oats can Scotland produce? How many tons of oats does Scotland need to trade in order to get 6 bagpipes? How many tons of oats does Scotland have left after trading oats for bagpipes? How many tons of oats did Scotland produce before specialization and trade? Gains from trade = # with spec - # w/o spec

WB p. 290 #1 In 4 hours, Scotland can produce 1 ton of oats If the production period is 60 hours, how many tons of oats can Scotland produce? 15 tons How many tons of oats does Scotland need to trade in order to get 6 bagpipes? 6 tons How many tons of oats does Scotland have left after trading oats for bagpipes? 15 – 6 = 9 tons How many tons of oats did Scotland produce before specialization and trade? 7.5 tons Gains from trade = # with spec - # w/o spec Gains from trade = 9 tons – 7.5 tons = 1.5 tons