Slides by John Dawson and Kevin Brady Begin Comparative Advantage Interactive Examples CoreEconomics, 2e To navigate, please click the appropriate green buttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 2

Answer Comparative Advantage Assume the U.S. and Ecuador produce and consume only bananas and wheat (measured in millions of metric tons) according to the table below. QUESTION 1: Which country has the absolute advantage in the production of bananas and which country has it in the production of wheat? Consumption-Production of Bananas and Wheat in the U.S. and Ecuador United StatesEcuador Bananas312 Wheat36 Interactive Examples

Next Comparative Advantage ANSWER TO QUESTION 1: A country has an absolute advantage in the production of a good when it can produce more of it than another country. In this example, Ecuador has an absolute advantage in the production of both goods. Interactive Examples

Answer Comparative Advantage QUESTION 2: What will total production of each good be if there is no specialization? Interactive Examples Consumption-Production of Bananas and Wheat in the U.S. and Ecuador (no specialization) United StatesEcuador Bananas312 Wheat36

Next Comparative Advantage ANSWER TO QUESTION 2: To find the total production, just add the individual country production levels across each good. Interactive Examples Consumption-Production of Bananas and Wheat in the U.S. and Ecuador (No Specialization) United StatesEcuador Total Bananas Wheat 3 6 9

Answer Comparative Advantage QUESTION 3: Calculate the opportunity cost of producing each good in each country and record your answers in the table below. Opportunity Costs of Producing Bananas and Wheat in the U.S. and Ecuador United StatesEcuador Bananas Wheat Interactive Examples

Next Comparative Advantage ANSWER TO QUESTION 3: The opportunity cost of producing bananas is determined by considering how much wheat must be given up to produce one more unit of bananas. The U.S. must forgo producing 3 million metric tons of wheat in order to produce an extra 3 million metric tons of bananas. Thus, the opportunity cost of producing 1 metric ton of bananas is 1 metric ton of wheat. In Ecuador, producers must forgo producing 6 million metric tons of wheat for every 12 million metric tons of bananas they wish to make. The opportunity cost of producing 1 million metric ton of bananas is 1/2 million metric ton of wheat. The other opportunity costs are calculated similarly. Interactive Examples Opportunity Costs of Producing Bananas and Wheat in the U.S. and Ecuador United StatesEcuador Bananas 1 Wheat 1/2 Wheat Wheat 1 Bananas 2 Bananas

Answer Comparative Advantage QUESTION 4: Which country has the comparative advantage in the production of bananas and which country has it in the production of wheat? Interactive Examples

Next Comparative Advantage ANSWER TO QUESTION 4: A country has a comparative advantage in the production of a good if it can produce the good at a lower opportunity cost than another country. Using the opportunity cost results from the previous question, the U.S. can produce a million metric tons of wheat at an opportunity cost of 1 million metric ton of bananas, compared to an opportunity cost of 2 million metric tons of bananas in Ecuador. Therefore, the U.S. has the comparative advantage in producing wheat in this example. However, in the U.S. the opportunity cost of producing bananas is 1 million metric ton of wheat, compared to Ecuador’s 1/2 million metric ton of wheat. So, Ecuador has the comparative advantage in producing bananas in this example. Interactive Examples

Answer Comparative Advantage QUESTION 5: Based on the comparative advantage each country has, what pattern of specialization and trade should occur between the U.S. and Ecuador? Interactive Examples

Comparative Advantage ANSWER TO QUESTION 5: Trade is based on the idea that each country should specialize in the production of the good in which it has a comparative advantage in producing and trade (export) that good in exchange for (imports of) goods in which the other country has a comparative advantage. Given the comparative advantage results obtained from the previous question, the U.S. should specialize in wheat production and Ecuador should specialize in banana production. Interactive Examples The End