1. AP Economics Mr. Bernstein Module 4: Comparative Advantage and Trade September 22, 2014

2. AP Economics Mr. Bernstein Trade Trade improves standards of living for everyone Specialization - Adam Smith’s The Wealth of Nations (1776) Markets are the mechanism that distributes goods and services the meets wants and needs 2

3. AP Economics Mr. Bernstein Comparative Advantage and Trade Comparative Advantage occurs when production by one party has a lower opportunity cost than the other Absolute Advantage occurs when one party has lower production costs than another Trade can be beneficial when one party has an absolute advantage in both products – comparative advantage is all that is required, and everyone has a comparative advantage at something! 3

4. AP Economics Mr. Bernstein Production Possibilities Curves for two countries 4

5. AP Economics Mr. Bernstein Trading 100 Units of Malaria Medicine for 200 Cotton Shirts 1. Calculate the opportunity costs of production for each country 2. Determine the comparative advantage for each country 3. Determine if the terms of trade are mutually beneficial 5

6. AP Economics Mr. Bernstein Trading 100 Units of Malaria Medicine for 200 Cotton Shirts 1. Calculate the opportunity costs of production for each country 2. Determine the comparative advantage for each country 3. Determine if the terms of trade are mutually beneficial 6

7. AP Economics Mr. Bernstein Trading 100 Units of Malaria Medicine for 200 Cotton Shirts 1. Calculate the opportunity costs of production for each country 2. Determine the comparative advantage for each country 3. Determine if the terms of trade are mutually beneficial Bangladesh has a comparative advantage in Cotton Shirts (C) because they only give up 1/3 unit of medicine while The United States must give up 1 unit of medicine to gain 1 cotton shirt. The United States has a comparative advantage in Malaria Medicine (M) because they only give up 1 cotton shirt while Bangladesh must give up 3 cotton shirts to gain 1 unit of medicine. 7

8. AP Economics Mr. Bernstein Trading 100 Units of Malaria Medicine for 200 Cotton Shirts 1. Calculate the opportunity costs of production for each country 2. Determine the comparative advantage for each country 3. Determine if the terms of trade are mutually beneficial The terms of trade are mutually beneficial as long as they are between the two countries’ opportunity costs. I.e.: 1/3 Unit of Medicine < 1 Cotton Shirt < 1 Unit of Medicine Bangladesh would not trade 4 shirts for 1 unit of medicine – they would rather produce meds themselves, with opp. cost of 3 shirts US would not trade 2 units of medicine for 1 shirt – they would rather produce the shirt themselves, with opp. cost of 1 unit of med. 8