Notebook # 26- Economics 17-1 Absolute & Comparative Advantage

Absolute & Comparative Advantage ESSENTIAL QUESTIONS: Why is international trade important in today’s economy? What are the concepts of absolute advantage & comparative advantage? Why does total world output increase as countries specialize to engage in trade?

Absolute & Comparative Advantage GPS STANDARDS : SSEIN1- Explain why individuals, businesses, and governments trade goods and services. a.) Define and distinguish between absolute and comparative advantage. b.) Explain that most trade takes place because of comparative advantage in the production of a good or service. c.) Explain the difference between the balance of trade and balance of payments.

l l Absolute & Comparative Advantage Nations trade according to the theory of comparative advantage. The key to trade–whether among people, states, or countries–is specialization.

l l Absolute & Comparative Advantage Some people specialize in cutting hair. Others specialize in fixing computers. These people exchange their services for money, which they then use to buy the specialized goods and services they need from others.

l l Absolute & Comparative Advantage Some people specialize in cutting hair. Others specialize in fixing computers. These people exchange their services for money, which they then use to buy the specialized goods and services they need from others.

l l Absolute & Comparative Advantage Different regions of a country specialize in certain economic activities in much the same way. New York, for example, is a center of the U.S. financial industry, and Detroit specializes in automobiles.

l l Absolute & Comparative Advantage The Midwest and High Plains areas are known for wheat farming. Texas is recognized for oil and cattle. Florida and California are famous for citrus fruit.

l l Absolute & Comparative Advantage All of these states trade with one another so that people in one area can consume the goods and services that workers in other areas offer. If you want to find out what a country specializes in, look at its exports—the goods and services that it produces and then sells to other nations.

l l Absolute & Comparative Advantage The U.S. and International Trade The sheer volume of exports and imports indicates that international trade is beneficial Nations trade because they believe the products they receive (imports) are worth more than the products they sell (exports).

l l Absolute & Comparative Advantage The U.S. and International Trade Without international trade, many products would not be available on the world market. Many imports to the United States are necessities that would be unavailable without trade.

l l Absolute & Comparative Advantage The Basis for Trade A country has an absolute advantage whenever it is able to produce more of a given product than another. Even when one country enjoys an absolute advantage, trade between it and another country is still beneficial because of comparative advantage.

l l Absolute & Comparative Advantage The Basis for Trade A country has a comparative advantage when it produce a product relatively more efficiently. Relative efficiency is determined by the opportunity cost of producing one product over another.

l l Absolute & Comparative Advantage The Gains From Trade Each country must produce more of the good in which it has a comparative advantage and then exchange the extra output for the extra output of its trading partners. Comparative advantage is based on the assumption that a country should produce a product that has a low opportunity cost.

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