1. Bellringer: Read about Tiger Woods’s dilemma written by N. Gregory Mankiw. Write the following question and answer on your bell ringer sheet below today’s date.

2. Should Tiger Woods mow his own lawn? Why or why not? Explain how people can benefit from specializing in certain tasks and trading. Tiger Woods spends a lot of time walking around on grass. One of the most talented golfers of all time, he can hit a drive and sink a putt in a way that most casual golfers only dream of doing. Most likely, he is talented at other activities too. For example, let’s imagine that Woods can mow his lawn faster than anyone else. But just because he can mow his lawn fast, does this mean he should? To answer this question, we can use the concepts of opportunity cost and comparative advantage. Let’s say that Woods can mow his lawn in 2 hours. In that same 2 hours, he could film a television commercial for Nike and earn $10,000. By contrast, Forrest Gump, the boy next door, can mow Woods’s law in 4 hours. In that same 4 hours, he could work at McDonald’s and earn $32. Who should mow Tiger’s grass?

3. In this example, Woods’s opportunity cost of mowing the lawn is $10,000 and Forrest’s opportunity cost is $32. Woods has an absolute advantage in mowing laws because he can do the work in less time. Yet Forrest has a comparative advantage in mowing lawns because he has the lower opportunity cost. The gains from trade in this example are tremendous. Rather than mowing his own law, Woods should make the commercial and hire Forrest to mow the law.

4. EQ: How do you compute comparative advantage and terms of trade? Agenda 1. Bellringer-Tiger Woods’s Dilemma 2. Lecture--Definitions 3. Burt and Betty Role Play 4. Lecture 5. Practice Problems

5. Theory from David Ricardo Explains the benefits of different individuals (or countries) specializing in a task (mowing laws, making commercials) and then trading.

6. Absolute advantage—the ability to produce more with the same amount of resources. Comparative advantage—the ability to produce with the least amount of opportunity cost

8. 1. Who is better at cleaning the dishes? Betty 2. If Bert and Betty work together, how many loads can they do in one hour? 3 loads—Betty can do two by herself and Bert can do one. 3. How many minutes would it take for them to wash one load of dishes working together? 20 minutes—one hour (60 minutes) divided by 3

9. 4. Who is better at sweeping up and taking out the trash? Betty 5. If Bert and Betty work together, how many loads of trash can they do in one hour? 4 loads—Betty can do three by herself and Bert can do one. 6. How many minutes would it take for them to sweep up and take out 3 loads working together 45 minutes—one hour (60 minutes) divided by 4= 15 minutes x 3 loads=45

10. Time to complete one sink full of dishes 20 minutes Time to complete three loads of trash 45 minutes Total time 65 minutes

11. Time for one sink full of dishes 30 minutes Time to complete 3 loads of trash 3 hours Total 3 hours

12. Time to complete one sink full of dishes 30 minutes Time to complete 3 loads of trash 1 hour Total time=1 hour 30 minutes

13. Time to complete one sink full of dishes 1 hour (by himself) Time to complete 3 loads of trash 1 hour (by herself) Total time 1 hour

14. Output problems=number of goods/services produced Input problems=amount of time or other resources used to produce DishwashingSweeping Betty23 Bert11

15. Step 1: Set up the problem in a table. Always set up the problems with the people (countries in the first column Always doing it the same way=less confusion DishwashingSweeping Betty23 Bert11 BettyBert Dishwashing21 Sweeping31

16. Step 2: Find the opportunity cost for each person and task. For output problems ONLY—put the opposite number on top and reduce the fraction (if needed) DishwashingSweeping Betty2 (3/2=1.5 sweeping) 3 (2/3 dishwashing) Bert1 (1/1=1 sweeping) 1 (1 dishwashing)

17. Step 3: Find who has the comparative advantage by looking at who has the lowest opportunity cost for each task. Who has the comparative advantage in dishwashing? Look at the dishwashing column See who has the lowest number as the opportunity cost. DishwashingSweeping Betty2 (3/2=1.5 sweeping) 3 (2/3 dishwashing) Bert1 (1/1= 1 sweeping) 1 (1 dishwashing)

18. Who has the comparative advantage in sweeping? Look at the sweeping column See who has the lowest number as the opportunity cost. DishwashingSweeping Betty2 (3/2=1.5 sweeping) 3 (2/3 dishwashing) Bert1 (1/1=1 sweeping) 1 (1 dishwashing)

19. You may be given the entire production possibilities table. Only look at the highest 2 numbers Production Possibilities for Mexico ABCDE Avocados 020244060 Soybeans 1510950 Production Possibilities for USA ABCDE Avocados 030336090 Soybeans 302019100

20. Who has the absolute advantage in avocados? The US--US can produce 90 and Mexico only 60. Who has the absolute advantage in soybeans. The US—US can produce 30 and Mexico only 15. Production Possibilities for Mexico ABCDE Avocados 020244060 Soybeans 1510950 Production Possibilities for USA ABCDE Avocados 030336090 Soybeans 302019100

21. Sometimes the problem uses the PPC instead of the table. Again, look to the highest numbers for each country (person)

22. AvocadosSoybeans United States Mexico 9030 6015

23. AvocadosSoybeans United States Mexico 9030 6015 1. Find the opportunity cost for each person and task. Put the opposite number on top and reduce the fraction. Opportunity cost to produce 1 avocado= 30 soybeans/90 avocados= 1 avocado=1/3 of a soybean (1/3)(3) (1/4)(4)

24. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) Step 2: Find who has the comparative advantage by looking at who has the lowest opportunity cost for each task. Who has the comparative advantage in avocados? Look at the avocado column See who has the lowest number as the opportunity cost.

25. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) Step 2: Find who has the comparative advantage by looking at who has the lowest opportunity cost for each task. Who has the comparative advantage in avocados? Look at the avocado column See who has the lowest number as the opportunity cost. The Mexico has the comparative advantage

26. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) Step 2: Find who has the comparative advantage by looking at who has the lowest opportunity cost for each task. Who has the comparative advantage in soybeans? Look at the soybean column See who has the lowest number as the opportunity cost.

27. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) Step 2: Find who has the comparative advantage by looking at who has the lowest opportunity cost for each task. Who has the comparative advantage in soybeans? Look at the soybean column See who has the lowest number as the opportunity cost.

28. US will make soybeans Export soybeans Import avocados Mexico will make avocados Export avocados Import soybeans

29. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) Sometimes problems will ask about what terms of trade (price per good) would be beneficial to both nations. For example—In order to be beneficial to both nations what should the terms of trade be for 1 avocado ? The easiest thing to do is to look at the column for avocados and place the terms of trade as in between the two numbers. 1 avocado for more than ¼ of a soybean but less than 1/3 of a soybean.

30. AvocadosSoybeans United States Mexico 9030 6015 (1/3)(3) (1/4)(4) What terms of trade would be beneficial to both nations for 1 soybean? 1 soybean for 3.5 avocados Must be more than 3 but less than 4. Why? It costs the US 3 avocados to make a soybean. So they must sell the soybean at a higher price than they’re cost. BUT Mexico can make a soybean for 4 avocados. So in order to benefit, they must pay less than 4 avocados per soybean. Who would benefit if the terms of trade were 1 soybean for 5 avocados? US—because they are the sellers and they want at least 3

31. 1. Absolute advantage in wheat? 2. Absolute advantage in TVs? 3. Comparative advantage in wheat? 4. Comparative advantage in TVs? 5. Who would benefit from 1 wheat for 2 tvs?

32. WheatTVs Country A200100 Country B50 (1/2) (2) (1) 1. Absolute advantage in wheat? A 2. Absolute advantage in TVs? A 3. Comparative advantage in wheat? A 4. Comparative advantage in TVs? B 5. Who would benefit from 1 wheat for 2 tvs? A

33. Not looking at how much the person (country) can produce, but how much resources it takes to produce the same good. Absolute advantage Who has the lower number? Why? Because it takes him/her less resources. Comparative advantage Set up the same way EXCEPT switch the order to find the opp. cost

34. Joe can produce a salad OR a smoothie in only two minutes, but his new trainee Liz takes much longer to produce salads—10 minutes. However, she has worked on her smoothie skills and can turn one out in the same time as Joe. Who has the absolute advantage in salads? Joe Who has the absolute advantage in smoothies? Neither Salads (production in minutes) Smoothies (production in minutes) Joe22 Liz102

35. Instead of putting the opposite number on top. Put the same on top. Joe is the same 2/2. But Liz--To find the opp. cost of producing 1 salad ask yourself, “How many smoothies could she produce in the time that it takes for her to produce 1 salad?” 10/2=5 Salads (production in minutes) Smoothies (production in minutes) Joe22 Liz102 (1) (5)(1/5)

36. Assume that: the US can produce a car in 16 minutes; Japan can produce one in 14 minutes; the US can produce a computer in 12 minutes; Japan can produce one in 8 minutes. 1. Which country has the absolute advantage in producing cars? Japan 2. Absolute advantage in producing computers? Japan 3. Comparative advantage in producing cars? 4. Comparative advantage in producing computers? 5. Terms of trade advantageous to both?

37. Cars (production in minutes) Computers (production in minutes) Japan 148 US 1612 14/8= 7/4= ( 1 ¾ ) (4/7) 16/12=4/3= ( 1 1/3 ) ( ¾ )

39. Who wins with free trade according to the theory of comparative advantage? Everyone? Consumers Some Producers Exceptions—dumping, currency manipulation Who may lose with free trade? Unskilled/ inadaptable labor Society, if unable to deal with problems of poverty with unemployed unskilled labor