1. TRADE-OFFS AND TRADE FALL 2013 Comparative Advantage

2. Production Possibilities for Two Castaways (a) Tom’s Production Possibilities 28400 30 9 Quantity of coconuts Quantity of fish

3. Production Possibilities for Two Castaways 1060 20 8 Hank’s PPF Quantity of coconuts Quantity of fish (a) Hank’s Production Possibilities

4. Tom and Hank’s Opportunity Costs Tom’s Opportunity Cost Hank’s Opportunity Cost One fish3/4 coconut2 coconuts One coconut4/3 fish1/2 fish

5. Specialize and Trade  Both castaways are better off when they each specialize in what they are good at and trade.  This is true of countries as well – and it is related to the concept of comparative advantage.

6. How the Castaways Gain from Trade

7. Comparative Advantage and Gains from Trade 28400 30 9 10 60 20 8 10 (a) Tom’s Production and Consumption Tom’s consumption without trade 30 Tom's PPF Hank's PPF Quantity of coconuts Quantity of fish Tom’s consumption with trade Tom’s production with trade (b) Hank’s Production and Consumption Hank’s production with trade Hank’s consumption with trade Hank’s consumption without trade

8. II. Absolute vs. Comparative Advantage  Absolute advantage: Greater total output  Comparative Advantage: Opportunity cost for producing something is lower for one person (or country) than the other.

9. III. The Circular-Flow Diagram  Model that represents the transactions in an economy by flows around a circle.

10. The Circular-Flow Diagram Money Factors Goods and services Factors Households Firms Markets for goods and services Factor Markets Goods and services Money