Trade: Comparative Advantage and Globalization

Explain?

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Comparative Advantage and Globalization BIG IDEA – When regions and nations use comparative advantage to produce at the lowest cost and then trade with others,……………increase. Interdependence Production Consumption Choices Standard of Living = Trade is Good

Absolute Advantage 1. Absolute advantage occurs when a country (or person) can produce more of a good given the same resources (inputs) Ex’s : Bob has the absolute advantage if…… Bob can produce 3 meals in 1 hour Brenda can produce only 2 meals in 1 hour 2. Defined another way: ……when a country (or person) can produce the same amount with less resources (inputs) Ex’s: Bob has the absolute advantage if….. Bob can produce 1 clay vase in 3 hours Brenda can produce 1 clay vase in 6 hours

To Trade or Not To Trade???...That is the Question 3. Absolute Advantage? Bob has it in both Should they trade? YES!!!!!! 4. Many people assume the answer is NO…..but trade is *better* for society …. 5. But Absolute Advantage does not tell us anything about trade…. The key is understanding COMPARATIVE ADVANTAGE

COMPARATIVE ADVANTAGE 6. Comparative advantage of regions and nations exists when they can produce goods or services at a …. lower opportunity cost than other individuals or nations. 7. Given the choice of producing one good or another, it is MORE EFFICIENT to produce the good with the lower opportunity cost 8. Specialization in the production of the good or service at a lower cost increases trade with others Discuss / Give ex’s of SPECIALIZATION

9. Why does COMPARATIVE ADVANTAGE exist 9. Why does COMPARATIVE ADVANTAGE exist? What creates a lower opportunity cost of production? Countries have different …… natural, human, and capital resources 10. Countries have different ways of combining these resources = not all countries are equally EFFICIENT at producing the goods and services that their residents demand

Bob can produce 4 meals in 1 hour Brenda can produce 1 meal in 1 hour Bob can produce 2 clay vases in 1 hour Brenda can produce 1 clay vase in 1 hour Absolute Advantage? = Bob- for both meals and vases Comaparative Advantage? = Need to find lower opp. cost for the production of each good

Find Lower O.C. Meals Bob can produce 4 meals in 1 hour Brenda can produce 1 meal in 1 hour Bob can produce 2 clay vases in 1 hour Brenda can produce 1 clay vase in 1 hour Bob’s oc of 1 meal = 2vases / 4 meals = ½ vase Brenda’s oc of 1 meal = 1 vase / 1 meal = 1 vase Bob has the lower oc of producing meals Bob should specialize in the production of meals and trade for the vases he needs Bob has the COMPARATIVE ADVANTAGE IN MEALS

Find Lower O.C of Vases Bob can produce 4 meals in 1 hour Brenda can produce 1 meal in 1 hour Bob can produce 2 clay vases in 1 hour Brenda can produce 1 clay vase in 1 hour Bob’s oc of 1 vase = 4 meals / 2 vases = 2 meals Brenda’s oc of 1 vase = 1 meal / 1 vase = 1 meal Brenda has the lower oc of producing vases Brenda should specialize in the production of vases and trade for the meals needed Brenda has the Comparative Advantage in vases

Once you know Bob has the comparative advantage in meals… Once you know Bob has the comparative advantage in meals…..then you AUTOMATICALLY know that Brenda has comparative advantage in vases 1 person can have the absolute advantage in both goods (Bob has absol.advant. in both meals and vases) …….but 1 person CAN NOT have the comparative advantage in both goods

Consider 2 Countries and goods X and Y When 1 country has the comparative in good X…… We say they would EXPORT good X and IMPORT good Y