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

Housekeeping Read Module 4 – do C/U and tackle the test. Quiz early next week on comparative advantage. I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

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

???? Why do nations trade? I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

Why do Nations Trade? Specialization leads to…. Gains from trade PROVE IT! I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

Absolute Advantage States Apples Timber Oregon 10 40 Washington I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

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

Absolute Advantage Terms of Trade 1 apple for 1 timber States Apples Oregon 40 (20) Washington I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done. 20 20

Gains from Trade States Apples Timber Oregon 5 to 20 20 Washington Total 25 to 40 I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

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

Comparative Advantage Lawn mowing example: Lawn Mowing

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

Should WA Trade? States Apples Timber Oregon 10 40 Washington 50 I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done.

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

Should WA Trade? Terms of trade 2 timber for 1 apple States Apples Oregon 40 (20) Washington 50 (40) I. There Are Gains From Trade   Ask the students who made their shoes? What have they eaten today? Who grew the food they ate? Why didn’t the students perform these tasks themselves? Are we better off because we can focus on being a student while someone else focuses on growing food or manufacturing our Fishes? A Trip to the Dentist Everyone has been to the dentist and we have all had an experience similar to this: You arrive, and are greeted by a receptionist. A hygienist takes x-rays of your mouth, then cleans and polishes your teeth. In the last five minutes of your visit, the actual dentist shows up. He/she inspects the work of the hygienist and asks if the hygienist has found anything out of the ordinary in your mouth. Why doesn’t the dentist perform all of these tasks? Isn’t he/she qualified to greet you at the door, take the x-rays, clean and polish your teeth and determine if there are any problems? What is the dentist doing while you spend your time with the hygienist? He or she is doing extractions, cosmetic surgery, root canals, etc. You know, the stuff that actually requires a medical degree to perform. So if your dentist performed all of the tasks that go into a typical visit to the dentist’s office, much of the specialized work would go undone. By employing a receptionist and a hygienist, all three persons can specialize and much more production is done. 10 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.

Summary of Key Concepts Absolute Advantage Comparative Advantage Terms of Trade

Fish and Chips

More Practice NZ and Spain China and USA

Input Oriented Problems Hrs / product Donuts Coffee Livingston 8 4 Montclair 24 Absolute advantage? Comparative advantage? Gains from trade?

Convert input questions into opportunity costs. Hrs / product Donuts Coffee Livingston 1unit 2 units Montclair 1 unit 3 units Montclair has a comparative advantage in coffee, and Livingston has one in donuts.