Module 4-*Comparative Advantage and Trade*

Module 4-”Comparative
Advantage and Trade”
By. J.A.SACCO
Absolute and Comparative
Advantage
O Countries/Individuals trade to maximize
production- specialization is the KEY!
 Absolute Advantage- One nation can
produce more output with the same quantity
of inputs (factors of production) as the other.
 Comparative Advantage- One nation can
produce a good at a lower opportunity cost
than the other- determines how countries
specialize.
Example- Babe Ruth?
Determining Comparative Advantage
(OUTPUT METHOD)
O Over a given period of time- Ex: tons per
acre, miles per gallon, words per minute,
apples per tree.
O In order to find comparative advantage is to
find who has the lowest opportunity cost.
O The following chart illustrates the number of
CD’s and pounds of beef that can be
produced in one hour.
Determining Comparative Advantage
(OUTPUT METHOD)
CD’s
Beef
Japan
4
2
Canada
4
6
Comparative Advantage
 To find the opportunity cost for “A”, divide
“B” by “A”.
 To find the opportunity cost for “B” ,divide
“A” by “B” .
LOWER IS BETTER!
Determining Comparative Advantage
(OUTPUT METHOD)
1. Which nation has an absolute advantage in
2.
3.
4.
5.
6.
producing CD’s?
Which nation has an absolute advantage in
producing beef?
Which has a comparative advantage in
CD’s?
Which has a comparative advantage in
beef?
Should Japan specialize in CD’s or beef?
Should Canada specialize in CD’s or beef?
Determining Comparative Advantage
(OUTPUT METHOD)
Japan
Canada
CD’s
4
4
Beef
2
6
* To produce 1 ___, your opportunity cost is ___.
1, Which nation has an absolute advantage in producing CD’s?
Japan and Canada
2. Which nation has an absolute advantage in producing beef?
Canada
3. Which has a comparative advantage in CD’s?
Japan
4. Which has a comparative advantage in beef?
Canada
5. Should Japan specialize in CD’s or beef?
CD’s
6. Should Canada specialize in CD’s or beef?
Beef
Determining Comparative Advantage
(INPUT METHOD)
O Inputs (usually time) to complete an activity.
Ex:# of hours to do a job, #of gallons of
paint to paint a house, #of acres to feed a
horse
O The key again is to find the lowest
opportunity cost
O The following chart illustrates the number of
hours it takes to produce one loaf of bread
and one bushel of corn
Determining Comparative Advantage
(INPUT METHOD)
Hrs/1Bread
Hrs/1 Corn
U.S.
4
2
France
4
6
 For absolute advantage in input method lower #
of inputs used is better.
 To find the opportunity cost for “A”, divide “A” by
“B”.
 To find the opportunity cost for “B” ,divide “B” by
“A”.
 For comparative advantage in input method,
lower is better!
Determining Comparative Advantage
(INPUT METHOD)
1. Which nation has an absolute advantage in
producing bread?
2. Which nation has an absolute advantage in
producing corn?
3. Which has a comparative advantage in
bread?
4. Which has a comparative advantage in
corn?
Determining Comparative Advantage
(INPUT METHOD)
U.S.
France
Hrs/1Bread
4
4
Hrs/1Corn
2
6
*To produce 1 ____, your opportunity cost is ____.
1. Which nation has an absolute advantage in producing bread?
France/U.S.
2. Which nation has an absolute advantage in producing corn?
U.S.
3. Which has a comparative advantage in bread?
France
4. Which has a comparative advantage in corn?
U.S.
Note in either the output method or the input method,
you can never have a comparative advantage in both
goods.
Production Possibilities for Two
Countries
1. Calculate the opportunity costs of
production for each country
2. Determine the comparative
advantage for each country
Production Possibilities for Two
Countries
Cotton Shirts
Bangladesh
United States
Malaria Medicine
Production Possibilities for Two
Countries
Cotton
Shirts
Bangladesh
750C = 250M
1C = 1/3M
United
States
1000C =1000M
1C = 1M
Malaria
Medicine
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
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.
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.