Unit 1 Comparative Advantage AP Macro © Robin Foster Alvin High School

Nations trade for several reasons They want goods Think of what we would do without if we didn’t trade. To make money.

Trade-deficit or surplus Trade surplus-exports exceed imports. Trade deficit-imports exceed exports. The USA has a trade deficit. A trade deficit=imports-exports The national debt is different.

Absolute Advantage v. Comparative Advantage Absolute Advantage-You produce the most. I bake 10 cookies, you bake 4 Faster, more, more efficient Comparative Advantage-I give up less to produce an item. Lower opportunity cost

David Ricardo English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.

Specialization Individuals and Countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.

Absolute and Comparative Advantage Let's use our tropical island example to identify who has absolute and comparative advantage in the production of fish and coconuts. You and I are stranded on a tropical island.

Absolute and Comparative Advantage Let's use our tropical island example to identify who has absolute and comparative advantage in the production of fish and coconuts.

Absolute and Comparative Advantage In one hour Tom can cut down 16 coconuts or catch 8 fish. In one hour Wilson the volleyball can cut down 21 coconuts or catch 7 fish.

Comparative Advantage Coconuts: Tom 8/16= .5 Wilson 7/21=.33 Fish: Tom 16/8= 2 Wilson 21/7= 3 Tom Wilson Coconuts (A) 16 21 Fish (B) 8 7

Let’s go back to David and Ricky

Ricky Ricardo Lucy’s Cuban- American husband drumming on the bongo.

Calculating Comparative Advantage Cakes *4 Ricky * 2 David *6 *8 Pizza

Example-Turn the PPF into a chart David Ricardo Ricky Ricardo Bake Cakes 2 cakes/hr. 4 cakes/hr. Make Pizza 6 pizzas/hr. 8 pizzas/hr.

Example David Ricardo Ricky Ricardo Bake Cakes 2 cakes/hr. 4 cakes/hr. Make Pizza 6 pizzas/hr. 8 pizzas/hr. Who has the absolute advantage in baking cakes? Who has the absolute advantage in making pizza?

Example David Ricardo Ricky Ricardo Bake Cakes 2 cakes/hr. 4 cakes/hr. Make Pizza 6 pizzas/hr. 8 pizzas/hr. Why? Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

Example David Ricardo Ricky Ricardo Bake Cakes 2 cakes/hr. 4 cakes/hr. Make Pizza 6 pizzas/hr. 8 pizzas/hr. Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

Example Why? Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake.

Example Furthermore, it only cost David 1/3 of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.

Input vs output problems-Know the difference!!!!!!!!!!!!!!!!!! Input problems Output problems These involve time to produce, such as # of hours or days. Use the highest # in calculations Something is produced such as cakes, pizza, shoes, etc. Use the lowest # in claculations.