AP Macroeconomics and Regular Economics Comparative Advantage (courtesy of Mr. Mayer)

alarm clockMADE IN JAPAN Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. coffeepotMADE IN CHINA electric razorMADE IN HONG KONG While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). dress shirt(MADE IN SRI LANKA)designer jeans (MADE IN SINGAPORE)tennis shoesMADE IN KOREA He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). electric skilletMADE IN INDIAcalculator (MADE IN MEXICO) After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. watch (MADE IN TAIWAN ) radio(MADE IN INDIA)car(MADE IN GERMANY)GAS Saudi Arabia AMERICAN JOB. After setting his watch (MADE IN TAIWAN ) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) filled it with GAS from Saudi Arabia & continued his search for a good paying AMERICAN JOB. computer (MADE IN MALAYASIA), At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYASIA), Joe decided to relax for a while. sandals (MADE IN BRAZIL) wine (MADE IN FRANCE)TV (MADE IN INDONESIA) He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in America.....

People always argue…. Is trading with countries a good thing??? What’s to be gained if we trade????

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

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

Absolute Advantage v. Comparative Advantage Absolute Advantage – Individual – exists when a person can produce more of a certain good/service than someone else in the same amount of time. – National- exists when a country can produce more of a good/service than another country can in the same time period. Comparative Advantage – Individual/National- exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation

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.

Example Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 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 Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr. Why? Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 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.