DO NOW WELCOME BACK & HAPPY NEW YEAR!!!!! Pick up handouts from table. 3B ONLY—CROSS OUT the WARM-UP section of Cornells.

Absolute & Comparative Advantage ESSENTIAL QUESTIONS: What are the costs and benefits of global trade and globalization? How do countries seek to maximize the benefits from international trade?

Absolute & Comparative Advantage OBJECTIVES: 4.1 Distinguish the difference between absolute and comparative advantage. 4.2 Describe the relationship between specialization and comparative advantage. LEARNING TARGET: I can distinguish between absolute and comparative advantage. I will show I understand by completing a practice worksheet comparing two economies.

WARM-UP: Absolute & Comparative Advantage Imagine you’re the manager of a fast food restaurant. You’re outgoing and interact well with the customers, and you’re proficient with the cash register. You’re also efficient in the kitchen and a good “multi-tasker.” You have one employee who is slow in the kitchen and struggles to cook while filling drink orders. They work the cash register well, but doesn’t interact much with the customers.

WARM-UP: Absolute & Comparative Advantage What is your opportunity cost if YOU work the register? What is your opportunity cost if YOU work in the kitchen? Based on your opportunity cost, where will YOU work? Why? Where will you place your employee? Why?

Absolute Advantage The condition that exists when someone can produce a good or service using fewer resources than someone else.

Economist associated with Absolute Advantage Adam Smith believed countries should look at their absolute advantage when deciding what to specialize in.

ABSOLUTE ADVANTAGE Guatemala China Absolute Advantage in Production Possibilities Who has the absolute advantage in bananas? Cell phones? Bananas Cell Phones Guatemala 500 50 China 75 Guatemala China

Comparative Advantage The condition that exists when someone can produce a good or service at a lower opportunity cost than someone else. Remember, Opportunity cost is the value of what you give up to do something else instead.

Economist associated with comparative Advantage David Ricardo believed countries should look at their comparative advantage (which goods have a lower opp. cost) when deciding what to specialize in.

Opportunity costs & Comparative ADVANTAGE Opportunity costs of BANANA production How many cell phones does Guatemala give up (opp. cost) to produce a banana? How many cell phones does China give up (opp. cost) to make a banana? Who has the comparative advantage in bananas? Bananas Cell Phones Guatemala 500 50 China 75 1 b = 1/10 cell phone 1 b = 6.7 cell phones 50 / 500 1 / 10 1/10 cell phone 500 / 75 100 / 15 6.7 cellphones Guatemala

Opportunity costs & Comparative ADVANTAGE Opportunity costs of CELL PHONE production: How many bananas does Guatemala give up (opp. cost) to make a cell phone? How many bananas does China give up (opp. cost) to make a cell phone? Who has the comparative advantage in cell phones? Bananas Cell Phones Guatemala 500 50 China 75 1 CP = 10 bananas 1 CP = 3/20 of a banana 500 / 50 100 / 10 10 bananas 75 / 500 15/100 3/20 of a banana China

VIDEO CLIPS A little Gilligan’s Island Now, to explain absolute & context… comparative advantage…

factors that give rise to comparative advantage Climate Natural resources Education Wage levels Technological differences

“Trade makes people better off…” WHO DOES Specialization Benefit? Specialization benefits both sides of the voluntary exchange. “Trade makes people better off…”

WHO DOES Specialization Benefit? Both sides use their resources to their comparative advantage. Who has the comparative advantage in cell phones? jeans?

QUICK CHECK Helen Helen Production per day Quilts Dresses Helen 4 16 Jane 2 10 Who has the absolute advantage in making DRESSES? Who has the absolute advantage in making QUILTS? Helen Helen

QUICK CHECK Production per day Quilts Dresses Helen 4 16 Jane 2 10 Opportunity cost for making 1 dress… HELEN’S JANE’S Opportunity cost for making 1 quilt… Who has the comparative advantage for quilts? 4 quilts for 16 dresses = 1 quilt for 4 dresses To make 1 dress, Helen gives up making 1/4 of a quilt 2 quilts : 10 dresses = 1 quilt : 5 dresses To make 1 dress, Jane gives up making 1/5 of a quilt 16 dresses : 4 quilts = 4 dresses : 1 quilt To make 1 quilt, Helen gives up making 4 dresses 10 dresses : 2 quilts = 5 dresses : 1 quilt To make 1 quilt, Jane gives up making 5 dresses