Warm Up Why do nations trade?

Tuesday, September 22, 2015 Objective: Students will be able to explain the concepts of absolute and comparative advantages. Purpose: Knowing the concept of comparative advantage will help you understand why certain nations produce and trade certain products.

International Trade International Trade: voluntary exchange of goods and services between nations Trade helps a nation move beyond their Production Possibility Curve GunS A F B C Butter

Absolute and Comparative Advantage Absolute Advantage: when a country can produce more of a given product than other countries using a given amount of resources.

Comparative Advantage Comparative Advantage: when a country, given the same amount of resources, can produce a product with a lower opportunity cost than another country can A country has a comparative advantage in the product that it can produce most efficiently given all of the products it could choose to produce.

Comparative Advantage To determine who has the lower opportunity cost we need to get our ratio to show for every one item produced what will be given up or what could have been produced using those resources. Example: Kate can produce 6 t-shirts or 3 birdhouses in 1 hour. Her opportunity cost is 1 birdhouse equals 2 t-shirts or 1 t-shirt equals a ½ a birdhouse Who should produce t-shirts? Who should produce birdhouses?

Advantages of Trade Based on Comparative Advantage all countries benefit - obtain more goods than if they produced everything on their own interdependence between countries is greater, countries no longer produce everything themselves. 3. standard of living increases for all