1. Comparative and Absolute Advantage
International Trade
Comparative and Absolute Advantage

2. International Trade
International trade - voluntary exchange of goods and services between people of different nations

3. International Trade
Trade helps a nation move beyond their Production Possibility Curve or Frontier
GunS A F B C
Butter

4. 3 Ways to Move Beyond PPF 1. Additional Resources 2. New Technology
3. International Trade

5. Who has the absolute advantage in cake production?
Billy bakes 10 cakes a day OR mows 5 lawns
Brenda bakes 9 cakes a day OR mows 3 lawns
Absolute Advantage:
The ability to produce more of a given product with given resources than another country.
Who has the absolute advantage in cake production?
Who has the absolute advantage in lawn mowing production?

6. Billy bakes 10 cakes a day OR mows 5 lawns
Brenda bakes 9 cakes a day OR mows 3 lawns
Absolute Advantage:
The ability to produce more of a given product with given resources than another country.
Who has the absolute advantage in cake production? Billy - 10 is more than 9
Who has the absolute advantage in lawn mowing production? Billy - 5 is more than 3

7. Billy bakes 10 cakes a day OR mows 5 lawns
Brenda bakes 9 cakes a day OR mows 3 lawns

8. COMPARATIVE ADVANTAGE
Billy bakes 10 cakes a day OR mows 5 lawns
Brenda bakes 9 cakes a day OR mows 3 lawns
COMPARATIVE ADVANTAGE
According to David Ricardo, whoever can make a product at the lowest opportunity cost should produce it.
To determine who has the lower opportunity cost we need to get our ratio to show for every one item produced what will be given up or what could have been produced using those resources.

9. Cakes Lawns Opportunity Cost 10 5 10 ÷5 5 ÷5
Billy bakes 10 cakes a day OR
mows 5 lawns
Cakes Lawns Opportunity Cost
10 ÷ ÷5
To produce 1 lawn it costs 2 cakes
2÷ ÷2
/2 To produce 1 cake the
opportunity cost is 1/2 lawn

10. Brenda bakes 9 cakes a day OR mows 3 lawns
Cakes Lawns
9 ÷ ÷ 3
To produce 1 lawn it costs
3 cakes
3÷ ÷3
/3 To produce 1 cake it costs 1/3
lawn

11. Who has the comparative advantage in cake production?
Billy
Cakes Lawns /2
Brenda
Cakes Lawns /3
Who has the comparative advantage in cake production?
Who has the comparative advantage in lawn production?

12. Billy
Cakes Lawns /2
Brenda
Cakes Lawns /3
Who has the comparative advantage in cake production? Brenda because 1/3 is less than 1/2
Who has the comparative advantage in lawn production? Billy because 2 is less than 3

13. Terms of trade, or trading range 1 lawn mowing for 2-3 cakes
Billy
Cakes Lawns /2
Brenda
Cakes Lawns /3
Terms of trade, or trading range
1 lawn mowing for 2-3 cakes
If trade takes place in this range it will be beneficial to both parties.

14. Advantages of trade based on comparative advantage:
1. all countries benefit - obtain more goods than if they produced everything on their own
2. interdependence between countries is greater, countries no longer produce everything themselves
3. standard of living increases for all

15. When Billy makes 1 more cake, he gives up 1/2 lawn.
PPF for Billy
CAKES
LAWNS
When Billy makes 1 more cake, he gives up 1/2 lawn.

16. When Billy mows 1 more lawn, he gives up 2 cakes.
PPF for Billy
CAKES
LAWNS
When Billy mows 1 more lawn, he gives up 2 cakes.

17. When Brenda bakes 1 more cake, she gives up 1/3 lawn.
PPF for Brenda
CAKES
LAWNS
When Brenda bakes 1 more cake, she gives up 1/3 lawn.

18. When Brenda mows 1 more lawn, she gives up 3 cakes.
PPF for Brenda
CAKES
LAWNS
When Brenda mows 1 more lawn, she gives up 3 cakes.

19. International Trade
Is based on
Comparative advantage; countries specialize in what they can produce more cheaply
Specialization
leads to
Economic efficiency
Less Self Sufficiency
Economic Interdependence
Specialization allows more efficient use of our scarce resources.