Absolute Advantage Comparative Advantage EQ: How do we gain from trade?

What was the most important document written in 1776?

He is my great, great, great, great, great grandfather on my mother’s side

What made The Wealth of Nations “THE” most important document written in 1776? Adam Smith wrote about a pin factory. What did they call the workers in the pin factory? Just a bunch of pinheads.

When he first observed the factory, he noticed that each worker was producing his or her own pins. By the end of the day, the total production by each worker was 20 pins. He stated that each worker should specialize in the production stage rather than produce his or her own pins. Through specialization, the total output by the factory increased to 48,000 pins per day. (Page 11, Wealth of Nations)

One person draws the wire. One person straightens the wire. One person cuts the wire. One person points the wire. One person grinds the wire at the top to receive the head of the pin. One person makes the head of the pin. One person attaches the head to the pin.

I am going to prove that specialization works. I am going to name a state and you tell me what that state specializes in: IdahoPotatoes FloridaOranges Texas Oil or cattle MichiganAutomobiles Nevada Any illegal activity that you can think of

Absolute and Comparative Advantage Betty types 120 w.p.m. with 0 errors Jim types 60 w.p.m. with 0 errors Who should do the typing, Betty or Jim? Betty.Why? Betty can type ABSOLUTELY faster than Jim can. What type of advantage does Betty have over Jim? Absolute Advantage

Absolute Advantage-- One entity can produce something either faster than or greater than another entity.

I forgot to tell you--Betty is a lawyer. A lawyer earns $60 an hour. A secretary earns $6 an hour. A 600-word document has to be typed, how long does it take each person to type this document? How long does it take Betty to type this document? How long does it take Jim to type this document?

Who should do the typing? Jim Comparative Advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity

Take absolute advantage and KICK IT OUT THE DOOR. The more important of the two is-- Comparative Advantage

Who has an absolute advantage in TVs? Fertilizer? JapanU.S. TV Fertilizer TV Fertilizer

Input (IOU) or Output (OOO)? Input = other goes under Output = other goes over

Who has the comparative advantage in the production of TV’s? Fertilizer? FertilizerTVs Japan20 1 ton Fertilizer = 4 TV’s 80 1 TV = ¼ ton Fertilizer U.S.50 1 ton Fertilizer = 1 TV 50 1 TV = 1 ton Fertilizer What is Japan’s opportunity cost of 1 ton fertilizer? What is Japan’s opportunity cost of 1 TV? What is the U.S.’s cost of 1 ton fertilizer? What is the U.S.’s opportunity cost of 1 TV?

Terms of trade – 1 TV = 3/4 tons of fertilizer JapanU.S. TV Fertilizer TV Fertilizer Consumption Possibilities Curve 62.5

Summary Please explain in your own words why trade makes us wealthier.