1. Absolute & Comparative Advantage

2. Absolute Advantage (AA) “the best” -- whoever has the most output (when input is fixed) OR --whoever has the least input (when output is fixed)

3. Comparative Advantage (CA) A person has a comparative advantage at producing something if they can produce it at lower cost than anyone else.

4. Two methods for calculating Opportunity Cost Output Method (used when problem tells you how much each producer makes with same resources) Input Method (used when problem tells you how many resources each producer uses to make the same amount of product)

5. WARNING!! The #1 reason students miss comparative advantage questions is confusion regarding whether the question is an output or input problem!

6. Let’s Practice! 1. CountryFoodClothing X20 hours50 hours Y10 hours20 hours Output or Input problem? INPUT

7. 2. CountryWheatCloth France 510 U.K.2060 Output or Input problem? OUTPUT

8. 3. Fundy & Mundy are 2 countries with comparable resources. Fundy can produce either 10 carrots or 12 celery. Mundy can produce either 10 carrots or 4 celery. According to this information Output or Input problem? OUTPUT

9. 4. Suppose you can paint a room or beat Super Mario Brothers. Your friend can paint a room in 1 hour. In order for her to have a comparative advantage in painting a room, how many times must she be able to beat Super Mario Brothers in 2 hours? Output or Input problem? OUTPUT

10. Output Method Output = O = over Code word: “per” What to do: put output of “other” product OVER output of “at issue” product for each person Amount or # must refer to the units of the product produced with a fixed amount of resources

11. Output Practice Produced per hour Bread Milk Bread Milk AA AA Gabrielle43 ¾4/3 CA Alphonse12 2½2½2½2½CA

12. Input Method Input = in Code word: “to” What to do: put the other product they make into or under the “at issue” product Amount or # must refer to the units of resources used to make a fixed amount of the product

13. Input Practice Acres to make one unit ApplesPears AA Harsha53 5/33/5 CACA Raja63 21/2

14. The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn. BreadCorn U.S.42 France46 Which nation has an absolute advantage in producing bread? Neither – both take 4 hours

15. The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn. BreadCorn U.S.42 France46 Which nation has an absolute advantage in producing corn? USA – produces a bushel in fewer hours (fewer resources used)

16. The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn. BreadCorn U.S.42 France46 Which nation has an comparative advantage in producing bread? France – only gives up 2/3s of a bushel of corn when making a loaf of bread; U.S. gives up 2 bushels of corn when making the same amount of bread

17. The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn. BreadCorn U.S.42 France46 Which nation has an comparative advantage in producing corn? USA – only gives up 1/2 of a loaf of bread when making a bushel of corn; France gives up 1.5 bushels of corn when making a loaf of bread

18. The following chart illustrates the # of hours it takes to produce 1 loaf of bread and 1 bushel of corn. BreadCorn U.S.42 France46 What will each nation gain if France trades a loaf of bread for a bushel of corn? US – gets chance to make 2 corn in the time it takes to make 1 bread France – chance to make 1.5 bread rather than make 1 corn

19. The following chart illustrates the number of CDs and pounds of beef that can be produced in 1 hour. CDsBeef Japan42 Canada46 Which nation has an absolute advantage in producing CDs? Neither – both make the same amount in 1 hour

20. The following chart illustrates the number of CDs and pounds of beef that can be produced in 1 hour. CDsBeef Japan42 Canada46 Which nation has an absolute advantage in producing beef? Canada – makes 6 in 1 hour compared to 2 from Japan

21. The following chart illustrates the number of CDs and pounds of beef that can be produced in 1 hour. CDsBeef Japan42 Canada46 Which nation has an comparative advantage in producing CDs? Japan – only gives up ½ a beef when making a CD; Canada gives up 1.5 CDs when making 1 beef

22. The following chart illustrates the number of CDs and pounds of beef that can be produced in 1 hour. CDsBeef Japan42 Canada46 Which nation has an comparative advantage in producing beef? Canada – only gives up 2/3s of a CD when making a beef; Japan gives up making 2 beef when making 1 CD

23. Why should a nation produce according to its comparative advantage? If each nation produces what it is comparatively best at making, then they can trade to fill in what they are less efficient at producing.

24. WARNING!! Because test makers are evil, you MAY see… AndrewSean Pickles56 Garlic33 What is difficult about the chart?