Understanding Comparative Advantage in International Trade

 
Comparative Advantage
 
 
Bill Gates Doesn’t Mow the Lawn
 
Microeconomic
Application
 
Why do many believe in Protectionism?
 
US Trade Balance
 
Should globalization be promoted?
 
Comparative Advantage Key Terms
 
International Trade (Open Economy)
Exports and Imports
The PPC Graph
Opportunity Costs
Absolute Advantage
Comparative Advantage
Specialization
 
The PPC Connection
 
 
 
Who has the absolute advantage in producing chairs? HDTVs?
 
Absolute Advantage
 
Luxembourg has the Absolute
Advantage in the production of both
products
24>16 Chairs
12>4  HDTVs
But according to David Ricardo’s theory
international trade should be based on
comparative advantage
 
Calculating Comparative Advantage
 
Country A
 
In one day Country A can either produce 6
units of food or 3 units of clothing.  Not
both.
For Every unit of food they give up 1/2 a
unit of clothing and for every unit of
clothing they produce they give up 2 units
of food.
What is given up is called………………………
 
OPPORTUNITY COSTS!
 
In the comparative advantage matrix the
production relationship is always reciprocal.
In Country B 1 unit of food 
costs 2 units of
clothing 
and 1 unit of clothing costs…………
2 units of food (the reciprocal)
Whichever nation has a 
lower opportunity
cost 
in the production of a good 
has
 the
comparative advantage
 
Who has the comparative advantage?
 
Country A has the comparative advantage in food
production.
They only give up ½ unit of clothing while
Country B gives up 2 units of clothing for every
unit of food they produce.
Country B has the comparative advantage in
clothing production for the same reason
Nation’s produce what they have the comparative
advantage in and trade for the other
This is called specialization (similar to Adam
Smith’s specialization of labor idea)
 
Specialization and the World Market
 
Former AP Questions
 
2003 Form B #3
2003 #3
2004 Form B #3
2008 #3
2015 #2
2016 #3
https://apcentral.collegeboard.org/courses/ap-
macroeconomics/exam
 Scroll to the bottom for
practice exam questions and answers.
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Dive into the concept of comparative advantage in international trade with examples of Absolute Advantage, Opportunity Costs, and the Importance of Specialization. Explore how countries can benefit from trading based on their differences in production efficiency rather than focusing solely on individual strengths.


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  1. Comparative Advantage

  2. Bill Gates Doesnt Mow the Lawn Microeconomic Application http://yinyangindia.files.wordpress.com/2013/05/bill-gates-2-0.png?w=604h=341

  3. Why do many believe in Protectionism?

  4. US Trade Balance

  5. Should globalization be promoted?

  6. Comparative Advantage Key Terms International Trade (Open Economy) Exports and Imports The PPC Graph Opportunity Costs Absolute Advantage Comparative Advantage Specialization

  7. Who has the absolute advantage in producing chairs? HDTVs? The PPC Connection

  8. Absolute Advantage Luxembourg has the Absolute Advantage in the production of both products 24>16 Chairs 12>4 HDTVs But according to David Ricardo s theory international trade should be based on comparative advantage

  9. Calculating Comparative Advantage

  10. Country A In one day Country A can either produce 6 units of food or 3 units of clothing. Not both. For Every unit of food they give up 1/2 a unit of clothing and for every unit of clothing they produce they give up 2 units of food. What is given up is called

  11. OPPORTUNITY COSTS! In the comparative advantage matrix the production relationship is always reciprocal. In Country B 1 unit of food costs 2 units of clothing and 1 unit of clothing costs 2 units of food (the reciprocal) Whichever nation has a lower opportunity cost in the production of a good has the comparative advantage

  12. Who has the comparative advantage? Country A has the comparative advantage in food production. They only give up unit of clothing while Country B gives up 2 units of clothing for every unit of food they produce. Country B has the comparative advantage in clothing production for the same reason Nation s produce what they have the comparative advantage in and trade for the other This is called specialization (similar to Adam Smith s specialization of labor idea)

  13. Specialization and the World Market

  14. Former AP Questions 2003 Form B #3 2003 #3 2004 Form B #3 2008 #3 2015 #2 2016 #3 https://apcentral.collegeboard.org/courses/ap- macroeconomics/exam Scroll to the bottom for practice exam questions and answers.

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