1. How to Compute Comparative and Absolute Advantage

2. 2 Methods: Input and Output
MUST READ THE WAY IT IS WORDED IN CHART OR STATEMENT!
Input method will provide data on the amount of resources needed to produce one method.
INPUT method: “IOU”
Input problem: Other goes Under
Output method will provide data on amount of output can be produced in a given time.
OUTPUT method: “OOO”
Output problem: Other goes Over

3. Inputs Outputs Time Raw materials Land Bushels Pounds
Minutes
Hours
Days
Years
Raw materials
Units of input needed
Land
Acres
Bushels
Pounds
Number of items produced

4. Checking for understanding
Units of output in a given day
Wheat (in bushels)
Cloth (in yards)
Portugal 10 20
England 60 1.
Labor Hours Needed to Produce a Unit of:
Wheat
Cloth
Portugal 10 20
England 60 2.
What’s the difference between these two types of problems?
How would you set it up?

5. Answer to checking for understanding
Units of output in a given day
Wheat (in bushels)
Cloth (in yards)
Portugal 10 20
England 60 1.
Labor Hours Needed to Produce a Unit of:
Wheat
Cloth
Portugal 10 20
England 60 2.
Problem 1 is an OUTPUT problem
Problem 2 is an INPUT problem
Calculation must be different! Output set it up to where other goes over
input set it up to where other goes under

6. Units of output in a given day
Practice Problem
Units of output in a given day
Wheat (in bushels)
Cloth (in yards)
Portugal 10 20
England 60 1.
OUTPUT method: “OOO”
Output problem: Other goes Over
What is Portugal’s opportunity cost of producing wheat? So cloth is other.
20 yards of cloth
10 bushels of wheat 1
What is England’s opportunity cost of producing wheat?
60 yards of cloth
20 bushels of wheat 2 =
= 2 yards of cloth =
= 3 yards of cloth

7. Labor Hours Needed to Produce a Unit of:
Practice Problem
Labor Hours Needed to Produce a Unit of:
Wheat
Cloth
Portugal 10 20
England 60 1.
INPUT method: “IOU”
Input problem: Other goes Under
What is Portugal’s opportunity cost of producing wheat?
10 hrs producing wheat =
20 hrs you could use to produce cloth
What is England’s opportunity cost of producing wheat?
20 hrs producing wheat =
60 hrs you could use to produce cloth
cloth =
cloth =

8. Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 min
5 min
Nancy
30 min
15 min
Who has absolute advantage over Radio’s? Bushel of wheat?
Does that mean they should or should not trade or does it matter?

9. Set up to determine the opportunity cost for each
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 min
5 min
Nancy
30 min
15 min

10. answers recall Opportunity cost of producing one radio
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 min
5 min
Nancy
30 min
15 min
recall
answers
Opportunity cost of producing one radio
Opportunity cost of producing one bushel of wheat
Ted
1 radio=20 min/5 min = 4 bushels
1 wheat= 5 min/20 min = ¼ radio
Nancy
1 radio = 30 min/15 min = 2 bushels
1 wheat = 15 min/30 min = 1/2 radios
Who should produce radios?
Wheat?

11. Radios produced per hour Wheat produced per hour
Use the data provided already and determine how many they can produce per hour.
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 min
5 min
Nancy
30 min
15 min
Radios produced per hour
Wheat produced per hour
Ted
Nancy
Radios produced per hour
Wheat produced per hour
Ted
60/20 = 3 radios ( it took 20 min to build 1 radio in the input method. 60 min in an hour/by minutes needed to build 1 will give you the number produced in an hour
60 minutes in an hour/5 minutes to produce= 12 bushels of wheat
Nancy
60/30= 2 radios
60/15=4 bushels
So ted can produce 3 radios in an hour and 12 bushels of wheat in an hour
Nancy can produce 2 radios in an hour and 4 bushels of wheat in an hour

12. In output method other goes over so take the outputs of Ted and Nancy and set up the computation to discover who has the lowest opportunity cost.
Radio
Wheat
Ted 3
12 bushels
Nancy 2
4 bushels
Ted
12/3 =4 bushels for every radio
3/12=1/4 bushel for every radio
Nancy
4/2= 2 bushels for every radio
2/4=1/2 radio for every bushel
To find the opportunity cost of radios with output you put other (wheat) over radio and then reduce fraction.

13. How much should we trade for then?
The difference in opportunity costs defines the limits of trade where both parties benefit.
Ted would not trade radios for anything greater than less than 4 bushels ( he can produce them for 4, so why trade if same or higher.
Nancy would accept no less than 2 bushels of wheat for 1 radio
So trade will fall between 2-4 bushels of wheat for 1 radio

14. radios
radios 3 2 2 1 1 4 6 8 4 6 8 12
wheat

15. Absolute and Comparative Advantage
Things to keep in mind:
The person/country with an absolute advantage can do more
The person/country with a comparative advantage has a LOWER OPPORTUNITY COST!!!!
Even if one person/country has an absolute advantage in the production of both goods – you can ALWAYS benefit if there is a comparative advantage between countries