1. International Economics
Absolute & Comparative Advantage
International Economics

2. Specialization and Trade: Everyone Benefits
What is specialization?
Individuals and businesses focus on one job or produce one thing.
Specialization increases the total amount of things a society can produce and leads to an efficient use of resources.

3. Specialization and Trade: Everyone Benefits
All nations benefit when regions and nations specialize in producing the things they can make most cheaply and easily.
A nation’s products depend on it resources.

4. Specialization and Trade: Everyone Benefits
Each nation sells some of its products to other nations. Then it buys things from other nations that it can’t produce easily itself. (trade) or that they can buy cheaper
Goods and services sold to other nations - Exports
Goods and services bought from other nations - Imports

5. Specialization and Trade: Everyone Benefits
Specialization and trade increases the amount and variety of goods available to all nations.

6. SSEIN1 Explain why individuals, businesses, and governments trade goods and services
Absolute advantage is the ability of a person or nation to produce more of a good at a lower cost than others.
You can tell by looking at who can produce MORE of a product.
Adam Smith: If Country A can produce furniture at a lower cost than Country B and Country B can produce wheat at a lower cost than Country A – trade will be mutually beneficial for both

7. Absolute Advantage vs. Comparative Advantage Example
The U.S. can produce more sugar and fertilizer than small nation of Nicaragua. The U.S. has an absolute advantage over Nicaragua in both areas because they can simply produce MORE.
However, the opportunity cost of producing sugar is higher in the U.S. than Nicaragua. To meet the demand, we would take resources away of producing other things

8. Absolute Advantage vs. Comparative Advantage: Table A
Sugar
Fertilizer
U.S. 80
100
Nicaragua 70 50
Total
150
Which country has an absolute advantage in producing sugar? Fertilizer?
Who should produce what?

9. Adam Smith quote…
“It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”
In your own words, what is he saying?

10. Comparative Advantage
Comparative advantage is producing the product more efficiently.
Countries focus on producing the good in which the opportunity cost of production is lowest
David Ricardo

11. Example of Comparative Advantage
Consider a group of volunteers who gather to build a home.
One of the volunteers is an expert builder who is better at all tasks than anyone else in the group.
However, if that person has to build the house alone, it will take him or her a long time.
Comparative advantage says that the skilled builder should focus on the tasks at which that person's advantage is greatest, that is, at which the person's efforts would be hardest to replace.
Others should each take on the tasks at which their disadvantage is smallest.
ated

12. Absolute Advantage vs. Comparative Advantage: Table A
Sugar
Fertilizer
U.S. 80
100
Nicaragua 70 50
Total
150
Which country has a comparative advantage in producing sugar? Fertilizer?
Who should produce what?

13. Absolute Advantage vs. Comparative Advantage
Nicaragua can produce sugar cheaper, while the opportunity cost of trying to produce fertilizer is too high.
The U.S. has a comparative Advantage over Nicaragua in producing fertilizer, so they will export to Nicaragua.
Nicaragua has a comparative advantage in sugar, so they export it to U.S.

14. Comparative Advantage Math Proof
Country
Sugar
Fertilizer
United States 80
100
Nicaragua 70 50
Who has a comparative advantage in sugar?
Put what you are looking for on BOTTOM – find ratio for each country
U.S. 100
80 (sugar) Ans = 1.25
Nic. 50
70 (sugar) Ans. = .714
Low number wins – Nicaragua has a comp. adv. In sugar

15. Who has comparative advantage in Fertilizer?
Country
Sugar
Fertilizer
United States 80
100
Nicaragua 70 50
We are looking for Fertilizer, so put fertilizer on bottom
U.S. 80
100 Ans = .80
Nic. 70
50 Ans = 1.4
Who has the comparative advantage in Fertllizer?

16. Balance of Trade Balance of trade = Exports - Imports.
When exports exceed imports, = Trade Surplus
When imports exceed exports, = Trade Deficit
Exports and imports do not have to be evenly balanced between any two particular countries
Most countries will have trade deficits with some countries and trade surpluses with other countries.
trade/statistics/highlights/toppartners.html#total

17. Top 10 Nations the U.S. Has a Trade Deficit with
trade/top/dst/2008/12/deficit.html
Top 10 Nations the U.S. Has a Trade Surplus with

18. Balance of Trade examples
Nation 1 – Imports $1 million worth of goods and services in the year 2007
National 1 exports $3 million worth of goods and services in the year 2007.
Does Nation 1 have a trade surplus or deficit? Of how much?
Nation 2 – Imports 5 million worth of goods and services in the year 2007
Nation 2 – Exports 2 million worth of goods and services in the year 2007
Does Nation 2 have a trade surplus or deficit? Of how much?

19. Balance of Payments
Balance of Trade only represents a part of the picture – to get the full picture we need to look at the Balance of Payments
Balance of Payments is the difference between the total amount of money coming into a nation and the total amount leaving (Credits – Debits)
Includes transactions between households, firms, and governments of one nation and those of another nation
Examples include transfer payments, tourism, military spending, interest on loans, corporate dividends, real estate, bank deposits, and buying and selling of currency

20. Balance of Payments
Ideally, a nation’s balance of payments should be zero or a positive number.
In recent decades, the U.S. has suffered from a negative balance of payments because of our trade deficit (including the cost of imported oil, foreign aid, and military investment abroad.

21. Balance of Payments
It is an accounting tool – just like a business or individual would keep up with money coming in and going out, so does the federal government
Current Balance of Payments – Who thinks it is positive or equals zero?
Let’s Find Out!
trade/statistics/historical/gands.pdf