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Module Comparative Advantage and Trade KRUGMAN'S MACROECONOMICS for AP* 4 Margaret Ray and David Anderson.

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Presentation on theme: "Module Comparative Advantage and Trade KRUGMAN'S MACROECONOMICS for AP* 4 Margaret Ray and David Anderson."— Presentation transcript:

1 Module Comparative Advantage and Trade KRUGMAN'S MACROECONOMICS for AP* 4 Margaret Ray and David Anderson

2 Housekeeping  Read Module 4 – do C/U and tackle the test.  Quiz early next week on comparative advantage.

3 What you will learn in this Module : How trade leads to gains for an individual or an economy The difference between absolute advantage and comparative advantage How comparative advantage leads to gains from trade in the global marketplace

4 Why do nations trade? ????

5 Why do Nations Trade? Specialization leads to…. Gains from trade PROVE IT!

6 Absolute Advantage Absolute Advantage StatesApplesTimber Oregon1040 Washington4010

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8 Pairs – What would you do? Pairs – What would you do? One player - OR Other player - WA

9 Terms of Trade 1 apple for 1 timber Absolute Advantage Absolute Advantage StatesApplesTimber Oregon40 (20) Washington40 (20) 20

10 Gains from Trade Gains from Trade StatesApplesTimber Oregon5 to 2020 Washington205 to 20 Total25 to 40

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12 Absolute Advantage Country has an absolute advantage when it can produce more of a good than other countries with the same amount of resources.

13 Comparative Advantage Lawn mowing example: Lawn Mowing

14 Comparative Advantage Comparative advantage arises because two parties have different opportunity costs.

15 Should WA Trade? Should WA Trade? StatesApplesTimber Oregon1040 Washington50

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17 Pairs – What would you do? Pairs – What would you do? One player - OR Other player - WA

18 Terms of trade 2 timber for 1 apple Should WA Trade? Should WA Trade? StatesApplesTimber Oregon40 (20) Washington50 (40) 20 10

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20 Terms of trade Terms of trade is the amount of one product exchanged for another expressed as a ratio. This ratio will lie between the opportunity costs for each trading partner.

21 Summary of Key Concepts Absolute Advantage Comparative Advantage Terms of Trade

22 Fish and Chips

23 More Practice More Practice NZ and Spain China and USA

24 Input Oriented Problems Input Oriented Problems Hrs / product DonutsCoffee Livingston84 Montclair248 Absolute advantage? Comparative advantage? Gains from trade?

25 Convert input questions into opportunity costs. Convert input questions into opportunity costs. Hrs / product DonutsCoffee Livingston1unit2 units Montclair1 unit3 units Montclair has a comparative advantage in coffee, and Livingston has one in donuts.


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