Absolute vs. Comparative

Definitions Absolute Advantage= the product or resource that a person, group, or society can produce more of (absolutely). Comparative Advantage= the product or resource that a person, group, or society can produce at the least possible cost.

Why Comparative Advantage? David Ricardo Says…Specialization. Economies or Indiviuals are better off finding their comparative advantage and specializing in that good, and then trading with other countries or people specialized goods.

Calculating the Comparative Advantage: United States Vietnam Shrimp 1000 2000 Computers Step 1: Find the cost of producing just 1 unit of each good

Calculating the Comparative Advantage: United States Vietnam Shrimp 1000 2000 Computers US Vietnam 1 shrimp= 2 comp 1 shrimp= ½ comp 1 comp.= ½ shrimp 1 comp.= 2 shrimp

Calculating the Comparative Advantage: The US has the Comparative Adv. in ____ Vietnam has the Comparative Adv. in ___ What does this mean? The U.S. will specialize in making computers and trade with Vietnam for shrimp and vice versa. In the long run both countries will be better off for specializing. United States Vietnam Shrimp 1000 2000 Computers US Vietnam 1 shrimp= 2 comp 1 shrimp= ½ comp 1 comp.= ½ shrimp 1 comp.= 2 shrimp

What’s a good trade? Terms of Trade: Trade that will be mutually advantageous for both countries. Look back at the cost involved in producing shrimp and computers for each country. US Vietnam 1 shrimp= 2 comp 1 shrimp= ½ comp 1 comp.= ½ shrimp 1 comp.= 2 shrimp

Terms of Trade US Vietnam 1 shrimp= 2 comp 1 shrimp= ½ comp 1 comp.= ½ shrimp 1 comp.= 2 shrimp What would be a trade that would help both countries exceed their Production Possibilities Frontier? ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp

Terms of Trade ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp Would 750 shrimp from Vietnam for 1250 computers from the U.S. be an acceptable trade for both groups? Well…

Terms of Trade 1 shrimp = 1 2/3 computers 1 computer = 6/10 shrimp Does it work? ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp YES!!