© 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Explain the law of comparative advantage. LO2Understand the gains from specialization and exchange. 2.3COMPARATIVE ADVANTAGE AND SPECIALIZATION 1 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Key Terms  absolute advantage  law of comparative advantage  specialization  barter  money  division of labor CHAPTER 2 2

© 2013 Cengage Learning. All Rights Reserved. Comparative Advantage  Absolute advantage—the ability to make something using fewer resources than other producers require  Law of comparative advantage—the worker, firm, region, or country with the lowest opportunity cost of producing an output should specialize in that output  Specialization—occurs when individual workers focus on single tasks, enabling each one to be more efficient and productive 3 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Gains from Specialization  Absolute advantage focuses on which worker uses the fewest resources, but comparative advantage focuses on what else those resources could have produced—that is, on the opportunity cost of those resources.  The law of comparative advantage indicates who should do what. 4 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Scenarios  Michael Jordan as the world’s best bball player and fastest typist…  Should MJ become a typist or continuing playing basketball? Why?  The United States having the absolute advantage in producing corn and computers over Ukraine.  Should the US produce more computers or corn? Why? CHAPTER 2 5

© 2013 Cengage Learning. All Rights Reserved. Exchange  Barter—a system of exchange in which products are traded directly for other products  Money—anything that everyone is willing to accept in exchange for goods and services 6 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Wider Application  Resources are allocated most efficiently around the world when production and trade conform to the law of comparative advantage.  One of Mankiw’s Principles = Trade can make EVERYBODY better off! 7 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Specialization  Because of specialization based on comparative advantage, most people consume little of what they produce and produce little of what they consume.  Division of labor organizes the production so that each worker specializes in a separate task. 8 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Example - Specialization in the Production of Cotton Shirts CHAPTER 2 9 Figure 2.3

© 2013 Cengage Learning. All Rights Reserved. Division of Labor  Takes advantage of individual preferences and natural abilities  Allows workers to gain experience at a particular task  Reduces the need to shift between different tasks 10 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Specialization that Results with Division of Labor  Occurs not only among individuals but also occurs among firms, regions, and entire countries 11 CHAPTER 2

© 2013 Cengage Learning. All Rights Reserved. Questions?  8BSDMM 8BSDMM  When we finish watching, write a brief summary that explains the concept of comparative advantage. CHAPTER 2 12