Daily Ten #1 - Shirts and Shoes Article Shirts Shoes Identify the country of origin for your shirts and shoes

Daily Ten #1 - Shirts and Shoes

Article

Shirts

Shoes

Identify the country of origin for your shirts and shoes.

Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also, faster, better, more productive at everything. The second man is old, weak, and uneducated. He produces less than the younger man. In some activities the difference between the two is great; in others it is small. For instance, the younger man can gather 50 coconuts every hour, or catch 150 fish. While the older man can only gather 5 coconuts or catch 25 fish every hour.

1. Who is better at all activities in the scenario above?2. What is the opportunity cost for the younger man if he

dedicates his hour to gathering coconuts?3. What is the opportunity cost for the older man if he dedicates

his hour gathering coconuts4. Should they work separately or together on the island?

Explain.

Activator Chapter 17 – International Economics

Chapter 17 – International Economics

Absolute Advantage – person or nation can produce more of a given product using a given amount of resources (I’m better than you)Comparative Advantage – the ability to produce a product with less opportunity cost (I can do something with less opportunity cost)Law of comparative advantage – a nation is better off when it produces goods and services for which it has a comparative advantage

oror

Chapter 17 – International Economics

Output – final good or service, maximum amount that can be produced“How much is produced”Ex. China manufactured 2 million iphones last year

Input – resources "put in" to the economy that will help to produce an output; shows the number of resources required to produce a specific amount

“How much is necessary to produce”Land, Labor, Capital (F.O.P.)Ex. It takes China 1 hour to produce 100 Iphones, it takes 6 workers, it takes 2 factories, etc.

Output vs. Input

1. The United States manufactures 2000 airplane engines ___________________

2. It takes the average worker 3 hours to produce a textile in China __________________

3. Saudi Arabia can produce up to 11 million barrels of crude oil ________________

4. It takes 1 machine to cultivate a farm (it used to take 10 people) __________________

5. McDonalds requires 2 acres of property to build a restaurant ______________________

6. McDonalds has the capability of producing 8500 burgers per minute ________________

7. It takes 2 hours and four workers to unload a truck at Wal-Mart ____________________

8. The United States produced 2000 tons of soybeans last year ____________________

Output vs. Input outputinputoutputinputinputoutputinput

output

Productivity

Coconuts Fish

Young Man 50 150

Old Man 5 25

Coconuts or Fish? Output Question

Productivity

Coconuts Fish

Young Man 50 150

Old Man 5 25

Young Man has absolute advantage because he can produce both items more efficiently than the old man


Comparative Advantage

Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50

50/150

25/5 5/25

OGO – “Other Goes Over” method shows the opportunity cost of production

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C


Young Man1 Coconut = 3 Fish1 Fish = 1/3 (.33) Coconut

Old Man1 Coconut = 5 Fish1 Fish = 1/5 (.20) Coconut

=

=

=

=

Young Man has comparative advantage in collecting coconuts because he gives up less fish relative to his production of coconuts than the old manHis opportunity cost for collecting coconuts is lower relative to the old manThe old man has the comparative advantage in catching fish because he gives up less coconuts relative to his production of fishHis opportunity cost for catching fish is lower• Important Note: the only time two people/nations/firms will

not trade is if there is no comparative advantage, opportunity cost is the same.


Coconuts Fish

Young Man 50 150

Old Man 5 25


Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C


Productivity

1 Coconuts 1 Fish

Young Man 1 hr. 2 hrs.

Old Man 3 hrs. 12 hrs.


Coconuts or Fish? Input Question

Absolute Advantage

1 Coconuts 1 Fish






Coconuts Fish



1/2 2/1 = 2

3/12 = 1/4

12/3 = 4

IOU – “Input - Other Goes Under” method shows the opportunity cost of production


Determining Comparative AdvantageDetermining Comparative Advantage

Scenario: Canada and Mexico are considering the trade of two goods. Canada can produce 100 Furs or 100 trees. Mexico can produce 50 furs or 200 trees.

Productivity

Fur TreesCanada Mexico

100/100

200/50

100/10050/200

= 1 T

= 4 T

= 1 F

= 1/4 F

•It costs Canada ______ fur for every tree it produces.•It costs Mexico ______ fur for every tree it produces.•It costs Canada ______ tree for every fur it produces.•It costs Mexico ______ tree for every fur it produces.

11/4 1 4

•Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

100 100

20050

China has comparative advantage in car productionUS has a comparative advantage in Cheese production

Determining Comparative AdvantageDetermining Comparative AdvantageHours per Car/Cheese

1 Car 1 Ton of Cheese

US 15 5

China 4 2

15/5 = 3 CH

5/15 = 1/3 CAR

4/2 = 2 CH

2/4 = 1/2 CAR

Kate and Carl Kate and Carl

1. It costs Kate ________ birdhouses to produce 1 t-shirt.2. It costs Kate ________ shirts to produce 1 birdhouse.3. It costs Carl ________ to produce 1 t-shirt.4. It costs Carl ________to produce 1 birdhouse.5. ________ has a comparative advantage when producing t-shirts.6. ________ has a comparative advantage when producing birdhouses.7. Therefore, ___________ should produce t-shirts and __________ should produce

birdhouses.

Productivity Per Hour

Opportunity cost of a T-Shirts

Opportunity cost of a Birdhouse

Kate

6 2

Carl 1 1

1/3

3

1

1

Kate

Carl

Kate

Carl




Kate

6 2/6 = _____ birdhouse

2 6/2 = ______ t-shirt

Carl 1 1/1 = _____ birdhouse

1 1/1 = ______ t-shirt

1/3 3

1 1

Karateconomics

Terms of TradeTerms of TradeTerms of trade – rate of exchange wherein both parties benefitGains from Trade – refers to the net benefits to agents from voluntary trading with each other; the specific amount that each party benefits through trade


Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50

50/150

25/5 5/25

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C

Coconuts or Fish? Terms of Trade

1

1 2 3 4 5

YM OM

Terms of Trade1C = 4 FishYoung Man

1 Coconut = 3 Fish1 Fish = 1/3 (.33) Coconut


Coconuts

Fish


Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50

50/150

25/5 5/25

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C

Coconuts or Fish? Terms of Trade

1

1

YM

OM

Terms of Trade1F = 1/4 CocunutYoung Man

1 Coconut = 3 Fish1 Fish = 1/3 (.33) Coconut


Coconuts

Fish

1/31/5

Output

Steel Televisions

Japan

S. Korea

Application Question Comparative Advantage•A Japanese worker can produce 6 units of steel or 3 televisions. A South Korean worker can produce 8 units of steel or 2 televisions.

Output

Steel Televisions

Japan 6 3

S. Korea

8 2

TVs

3/6 = 1/2 TV 2/8 = 1/4 TV

6/3 = 2 STL8/2 = 4 STL

1

2 3 4 5

Terms of Trade1TV = 3 Steel1 Steel = 1/3 TV

Steel

Japan1 Steel = 1/2 TV1 TV = 2 Steel

S. Korea1 Steel = 1/4 TV1 TV = 4 Steel Japan S. Korea

1


Steel Televisions

Japan

SKorea

Productivity

Steel Televisions

Japan 6 3

S. Korea

8 2

Ste

el

0 0S

tee

lTelevision

sTelevisions

Japan South Korea

*Important Point: The production possibilities frontier is linear in these cases because the labor resource can be moved from the production of one good to the other at a constant rate.*

3/6 = 1/2 TV 2/8 = 1/4 TV

6/3 = 2 STL8/2 = 4 STL

Gains from trade +1/2 TV

Gains from trade +1/4 Steel

1 2 3 4 5 6 7 8

121110

987654321

1 2 3 4 5 6 7 8

121110

987654321

1. Japan produces all TVs (3), exporting 1 for 3 units of steel. 2. South Korea produces all steel (8), and exports 3 units for 1 television.

Gains From Trade ExampleGains From Trade ExampleSlavia and Lebos are considering the trade of two goods, clothing and food. Slavia can produce 10 food or 10 clothing. Lebos can produce 3 Food or 9 Clothing.

Productivity

Food Clothing

Slavia

Lebos

10/10 = 1 C 9/3 = 3 C

10/10 = 1 F3/9 = 1/3 F

•First, Input the data to determine who has a comparative advantage in production.

•Indicate Per Unit Opportunity Cost:

Slavia 1 F = _______ C 1C = _______F

Lebos 1 F = _______ C 1C = _______F

•Who has the comparative advantage in the production of food? _________________________________

•Who has the comparative advantage in the production of clothing? _________________________________

10 10

3 9

1 1

Slavia

Lebos

• Term of Trade• If Slavia wants to experience gains from trade then they must agree to trade 1 food for more

than _________ clothing.• If Lebos wants to experience gains from trade then they must agree to trade for less than

________ clothing for 1 food.

3 1/3

1

3

1

2 31

Food

Clothing

• First, graph original production possibilities• Then, graph the new points based on gains trade.

• Slavia and Lebos agree to trade at a rate of 1 food for 2 clothing (1F = 2C). • Slavia produces all food (10) and trades 1 food for 2 clothing. • Therefore ending up with 9 food and 2 clothing.• Lebos produces all clothing (9) and trades 2 clothing to Slavia for 1 food. • Therefore, Lebos ends up with 7 clothing and 1 food.

Food

0Clothing

Slavia

Gains from trade +1/3 Food

1 2 3 4 5 6 7 8 9 10

LebosFood

0

10

9

8

7

6

5

4

3

2

1

Clothing

1 2 3 4 5 6 7 8 9 10

10

9

8

7

6

5

4

3

2

1

Gains from trade +1 Clothing

Application Question Comparative Advantage•Two people are academics who are paid for how many papers they produce. In one year Jane can write 4 economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out who should be the lawyer and who should be the economist.•Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity cost in the chart below

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Productivity Per Year

Economics Papers Law Papers

Jane

4 6

John

3 1

Law PapersLaw Papers

6/4 = 1.5 LP 1/3 = .33 LP

4/6 = 2/3 EP3/1 = 3 EP

Jane John

Application Question Comparative Advantage•They end up producing a total of 9 papers, 6 law papers and 3 economics papers. They decide to trade one law paper for one of economics papers; Jane ends up with 5 law papers and 1 economics paper while John can have 1 law paper and 2 economics papers•Plot the new points on the respective PPFs.

5 6

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Jane John

*Notice that they have broken through the constraints imposed by the scarcity of time. Both of these points lie outside the respective PPFs. John could not have written 1 law paper and 2 economics papers in a year because it takes him a year just to write the law paper. Jane could never have written 5 law papers and 1 economics papers in one year: it would have taken her 13 months to do so.*

Closed economy - does not interact with other economies in the worldOpen economy - interacts freely with other economies around the world

Closed and Open Economies

Trade Barriers and AgreementsTrade Barrier – a trade restriction, used to prevent a foreign product from freely entering a nation’s territoryTariffs – a tax on imported goodsEmbargo - partial or complete prohibition of commerce and trade with a particular country, in order to isolate it.Customs Duty – a tax on items purchased abroadImport Quotas – a limit on the amount of a good that can be importedVoluntary Export Restraint – a self-imposed limitation on the number of products shipped to a particular country (exports)

Balance of Trade Trade surplus - excess of exports over imports

Exports > ImportsTrade deficit - excess of imports over exports

Exports < ImportsBalanced trade - exports equal imports

Exports = Imports

Balance of Trade

Arguments for Protectionism

Protectionism – the use of trade barriers to protect industries from competitionInfant industry – a newly founded industry in the early stages of development

International Cooperation and AgreementsInternational Free Trade Agreement – results from trade blocs between countries to reduce trade barriers and tariffs to promote trade

1. North American Free Trade Agreement (NAFTA) – agreement between Canada, Mexico and the U.S. to eliminate tariffs and other trade barriers

2. European Union (EU) – a regional trade organization of European nations3. Association of Southeast Asian Nations (ASEAN) - economic organization of

ten countries located in Southeast Asia

Measuring TradeExchange Rate – the value of one foreign nation’s currency in relation to another nation’s currency

Fixed exchange rate system – a currency system in which governments try to keep the value of their currencies constant against one anotherFlexible exchange rate system – a currency system that allows the exchange rate to be determined by supply and demand (most major currencies have this)

Determining the Rate of Exchange 1 Dollar = 12 Mexican PesosHotel room costs 500 Pesos per night 500/12 = $41.661/12 = .083 x 500 = $41.66

Absolute and Comparative Advantage Practice

Productive OutputRice Beans

India 20 10

United Kingdom 5 15

•Which country enjoys an absolute advantage in beans? United Kingdom•Which country enjoys an absolute advantage in rice? India


Productive OutputRice Beans

India 20 10

United Kingdom 5 15

Who has the higher opportunity cost when producing Rice? UKWho has the higher opportunity cost when producing Beans? IndiaWho has comparative advantage when producing Beans? UKWho has comparative advantage when producing Rice? IndiaTherefore, India should specialize in the production of, Rice while the U.K. should specialize in the production of Beans

10/20 = 1/2 Beans 20/10 = 2 Rice

15/5 = 3 Beans 5/15 = 1/3 Rice


Productive OutputFish Vegetables

Country X 14 10

Country Y 14 15

Which of the following is true?a.Country Y has absolute advantage in producing both fish and vegetables, but comparative advantage in fish.b.With trade, country X will import fish.c.Country Y has comparative advantage in producing fish.d.These countries will not be able to benefit from specialization and trade.e.Country X will export fish to country Y.Answer: _____e________

10/14 = .71 Vegs 14/10 = 1.4 Fish

15/14 = 1.07 Vegs 14/15 = .93 Fish


Productive OutputGuns Butter

Russia 60 20

Cuba 30 10

•Which country enjoys an absolute advantage? Russia


Productive OutputGuns Butter

Russia 60 20

Cuba 30 10

9. For every Gun that Russia produces, they give up _____1/3________ Butter.10. For every Butter that Russia produces they give up ____3________ Guns.11. For every Gun that Cuba produces they give up ______1/3_____ Butter.12. For every Butter that Cuba produces they give up _____3_______ Guns.13. Why is there no comparative advantage? Opportunity Cost is the same14. Therefore, the two countries should not trade is when their opportunity cost

is__________equal/the same____________________

20/60 = 1/3 Butter 60/20 = 3 Guns

10/30 = 1/3 Butter 30/10 = 3 Guns


Cars Bikes

Italy 4 2

Morocco 5 1

•Which country enjoys an absolute advantage in cars? Italy•Which country enjoys an absolute advantage in bikes? Morocco


Cars Bikes

Italy 4 2

Morocco 5 1

9. For every Gun that Russia produces, they give up _____1/3________ Butter.10. For every Butter that Russia produces they give up ____3________ Guns.11. For every Gun that Cuba produces they give up ______1/3_____ Butter.12. For every Butter that Cuba produces they give up _____3_______ Guns.

4/2 = 2 Bikes 2/4 = 1/2 Cars

5/1 = 5 Bikes 1/5 Cars

Exchange Rate

_________ Dollar ÷ _________ Euro = _________ Euro per dollar x 200 = _________

You and your family decide to go to Italy for a vacation. You find out that a hotel room in Italy costs 200 Euros per night. Determine the how much it would cost in American dollars for you and your family to stay each night. Use the information below. - 1 US Dollar = .75 Euro

1 .75 1.333

You and your family decide to go to the Colombia for a vacation. You find out that a hotel room in Colombia costs 300 Pesos per night. Determine the how much it would cost in American dollars for you and your family to stay each night. Use the information below.- 1 US Dollar = 1953.40 Pesos

1 1953.40 .15

266.67

_________ Dollar ÷ _________ Peso = _________ Peso per dollar x 300 = _________.0005

Due Tuesday 11 – 24 (Open Notes Test)

1. Do Now Chapter 17 Section 12. Notes Chapter 17 Section 13. Guided Reading Activity

Section 1 and 24. Comparative Advantage

Practice5. Chapter Articles (NAFTA,

Economic Profile)6. Exchange Rate Webquest7. Study Guide Chapter 178. Crossword Puzzle Chapter 179. VIS Terms

Due Tuesday 11 – 24 (Open Notes Test)

1. Do Now Chapter 17 Section 12. Notes Chapter 17 Section 13. Guided Reading Activity Section 1 and

24. Comparative Advantage Practice5. Chapter Articles (NAFTA, Debating

Current Issues)6. Article – Comparative Advantage7. Exchange Rate Webquest8. Comparative Advantage Webquest9. Study Guide Chapter 1710. Crossword Puzzle Chapter 1711. VIS Terms

Specialization and TradeCarl

Specialization

Trade Net Effect

Carl Specializes, switching 2 hours from t-shirt production to birdhouse production

Carl trades 1 birdhouse for 2 t-shirts

Net effect is same number of t-shirts and 1 more birdhouse

Kate

Specialization

Trade Net Effect

Kate specializes, switching one half-hour from birdhouse production to t-shirt produciton

Kate trades 2 t-shirts for 1 birdhouse

Net effect is the same number of birdhouses and 1 more t-shirt

Specialization and TradeAgree to trade 1 C for 4 FishYoung man collects 1 coconut costing himself 3 fishThe Old Man collects 5 fish costing himself 1 coconut

South Africa and Japan ApplicationSouth Africa and Japan Application

Productive Output

Scenario: South Africa and Japan are considering the trade of two goods. Japan can produce 40 Wheat or 8 DVDs. Japan can produce 8 Wheat or 4 DVDs.

Wheat DVDsSouth Africa Japan

40 8 8 4

Opportunity Cost

Wheat DVDs South Africa Japan

8/40 4/8

40/88/4

= 1/5 DVD

= 1/2 DVD= 5 W= 2 W

Step 1 – Input the Data

Step 2 – Find the Opportunity Cost of Production

Step 3 – Analyze the Data to Determine Comparative Advantage•It costs S.A. ______ DVDs for every Wheat it produces.•It costs Japan ______ DVD’s for every Wheat it produces.•It costs S.A. ______ Wheat for every DVD it produces.•It costs Japan ______ Wheat for every DVD it produces.

11/4 1 4

•Therefore, South Africa should produce the wheat and Japan should produce the DVDs.

Application Questions – pgs. 58 – 59 Should Tiger Woods Mow His Own Lawn?

1. What does Tiger Woods hold an absolute advantage in?2. What does Forrest Gump have a comparative advantage in?3. What is the opportunity cost for both Tiger and Forrest for

mowing the lawn?4. Why are the gains from trade beneficial in this scenario?

Should The United States Trade With Other Countries?1. Define imports and exports.2. Create a chart to show the production of cars and food in

the U.S. and Japan.3. What is the opportunity cost for both countries production

of cars and food?4. Who has a comparative advantage in the production of

each?Answer the question to the “Quick Quiz”








Productivity Per Month

Food Cars

U.S.

Japan








Productivity Per Month

Food Cars

U.S. 2 = ½ 1 = 2

Japan

1 = 1 1 = 1

Review Question Comparative Advantage•Two people are academics who are paid for how many papers they produce. In one year Jane can write 4 economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out who should be the lawyer and who should be the economist.•Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity cost in the chart below

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Jane

John


Jane John

Ste

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0 0

Ste

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Steel Televisions

Japan

Korea

TelevisionsTelevisions

Japan South Korea

1 2 3 4 5 6 7 8

121110

987654321


1 2 3 4 5 6 7 8

121110

987654321

Application Question Comparative Advantage•A Japanese worker can produce 6 units of steel or 3 televisions per hour. A South Korean worker can produce 8 units of steel or 2 televisions per hour. 1.Create two graphs that summarize all the possible choices that they can produce.2.Determine opportunity cost for each country using the table below.3.Indicate the absolute and comparative advantage based on the table below.4.What should be the range of prices at which each country would be willing to exchange?

Suppose that Japan and South Korea settle on a trading price of 3 units of steel for 1 television (or 1/3 of a television for 1 unit of steel). Plot the new points based on gains from trade1. Japan produces 3 TVs, exporting 1 for 3 units of steel. 2. South Korea produces 8 units of steel, and exports 3 units for 1

television, this allows them to consume 5 units of steel and 1 television.

Application Question Comparative Advantage•A Japanese worker can produce 6 units of steel or 3 televisions per hour. A South Korean worker can produce 8 units of steel or 2 televisions per hour. 1.Create two graphs that summarize all the possible choices that they can produce.2.Determine opportunity cost for each country using the table below.3.Indicate the absolute and comparative advantage based on the table below.4.What should be the range of prices at which each country would be willing to exchange?


Steel Televisions

Japan

SKorea


Steel Televisions

Japan 6 3

SKorea

8 2

Ste

el

0 0

Ste

el

TelevisionsTelevisions

Japan South Korea

1 2 3 4 5 6 7 8

121110

987654321


1 2 3 4 5 6 7 8

121110

987654321

3/6 = 1/2 TV 2/8 = 1/4 TV

6/3 = 2 STL8/2 = 4 STL

Gains from trade +1 Steel

Gains from trade +1/4 TV


Cases Tapes

Tom 1000 4000

Nancy 4000 1000

= 4 Tapes = ¼ Tape

= ¼ Case = 4 Cases

Tom

Cases (in the thousands)

3

4

2

1

0 1 2 3 4

Tapes (in the thousands)


3

4

2

1

0 1 2 3 4

Tapes (in the thousands)

NancyProduction

without trade

Productionwith trade

Productionwithout trade

Productionwith trade

Gains from Trade:Tom – 1500 (Cases)

Nancy – 1500 (Tapes)

Application Question Comparative Advantage•Two people are academics who are paid for how many papers they produce. In one year Jane can write 4 economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out who should be the lawyer and who should be the economist.•Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity cost in the chart below

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Jane

4 6

John

3 1


6/4 = 1.5 LP 1/3 LP

4/6 = 2/3 EP3 EP

Jane John


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3 1


6/4 = 1.5 LP 1/3 LP

4/6 = 2/3 EP3 EP

Jane John


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Jane John

*Notice that they have broken through the constraints imposed by the scarcity of time. Both of these points lie outside the respective PPFs. John could not have written 1 law paper and 2 economics papers in a year because it takes him a year just to write the law paper. Jane could never have written 5 law papers and 1 economics papers in one year: it would have taken her 13 months to do so.*

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4 6

John

3 1

Law Papers

6/4 = 1.5 LP 1/3 LP

4/6 = 2/3 EP3 EP

Tom

John


3

4

2

1

0 1 2 3 4

Tapes (in the thousands

Essential Questions What is the difference between absolute and comparative advantage?

Absolute advantage, a country can produce _________ of a good.Comparative advantage, a country can produce _________ opportunity cost.

Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also, faster, better, more productive at everything. The second man is old, weak, and uneducated. He produces less than the younger man. In some activities the difference between the two is great; in others it is small. For instance, the younger man can gather 50 coconuts every hour, or catch 150 fish. While the older man can only gather 5 coconuts or catch 25 fish every hour.

1. Who is better at all activities in the scenario above?2. What is the opportunity cost for the younger man if he

dedicates his hour to gathering coconuts?3. What is the opportunity cost for the older man if he dedicates

his hour gathering coconuts4. Should they work separately or together on the island?

Explain.

Chapter 17 – International Trade

Chapter 17 – International Trade

Absolute Advantage – a nation can produce more of a given product using a given amount of resourcesComparative Advantage – the ability to produce a product most efficiently given all the other products that could be produced (less opportunity cost)Law of comparative advantage – a nation or person is better off when it produces goods and services for which it has a comparative advantageGlobalization - the process by which regional economies, societies, and cultures have become integrated through communication, transportation, and trade.

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Coconuts or Fish?Absolute Advantage

Coconuts Fish

Young Man 50 150

Old Man 5 25

Coconuts or Fish?Absolute Advantage

Coconuts Fish

Young Man 50 150

Old Man 5 25


Coconuts or Fish?Comparative Advantage

Coconuts Fish

Young Man 50 150

Old Man 5 25


Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50

50/150

25/5 5/25

OGO – Other goes over method shows the opportunity cost of production

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C


Coconuts Fish

Young Man 50 150

Old Man 5 25


Coconuts Fish

Young Man 50 150

Old Man 5 25

150/50 = 3 F

50/150 = 1/3 C

25/5 = 5 F

5/25 = 1/5 C

Young Man has comparative advantage in collecting coconuts because he gives up less fish relative to his production of coconuts than the old manHis opportunity cost for collecting coconuts is lower relative to the old manThe old man has the comparative advantage in catching fish because he gives up less coconuts relative to his production of fishHis opportunity cost for catching fish is lower• Important Note: the only time two people/nations/firms will not trade is if there is no

comparative advantage, opportunity cost is the same.

Steps for Determining Comparative AdvantageSteps for Determining Comparative Advantage

Productive Output

Scenario: Canada and Mexico are considering the trade of two goods. Canada can produce 100 Furs or 100 trees. Mexico can produce 50 furs or 200 trees.


100 100 50 200

Opportunity Cost


100/100 200/50

100/10050/200

= 1 T= 4 T

= 1 F= 1/4 F

Step 1 – Input the Data

Step 2 – Find the Opportunity Cost of Production

Step 3 – Analyze the Data to Determine Comparative Advantage•It costs Canada ______ fur for every tree it produces.•It costs Mexico ______ fur for every tree it produces.•It costs Canada ______ tree for every fur it produces.•It costs Mexico ______ tree for every fur it produces.

11/4 1 4

•Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

Kate and Carl Kate and Carl Productivity Per Hour

T-Shirts per hour Birdhouses per hour

Kate

6 2

Carl 1 11. Who has absolute advantage in this situation?

2. It costs Kate ________ birdhouses to produce 1 t-shirt.3. It costs Kate ________ shirts to produce 1 birdhouse.4. It costs Carl ________ to produce 1 t-shirt.5. It costs Carl ________to produce 1 birdhouse.6. ________ has a comparative advantage when producing t-shirts.7. ________ has a comparative advantage when producing birdhouses.8. Therefore, ___________ should produce t-shirts and __________ should produce

birdhouses.




Kate = _____ birdhouse

= ______ t-shirt

Carl = _____ birdhouse

= ______ t-shirt

1/3 3

1 1

1/3

3

1

1

Kate

Carl

Kate

Carl

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Documents

Daily Ten #1 - Shirts and Shoes Article Shirts Shoes Identify the country of origin for your shirts and shoes