1. Absolute Advantage vs Comparative Advantage

2. Absolute Advantage  Absolute Advantage – the ability to produce more of a given product with the same amount of resources  If Joe can mow 3 lawns in an hour and Pete can mow 2 lawns in an hour, Joe has the absolute advantage in cutting lawns

3. Examples  Ex 1: Rasheed Wallace scores 12 points and 9 rebounds, while Allen Iverson averages 18 points and 3 rebounds.  Who has the absolute advantage in scoring?  Who has the absolute advantage in rebounds?

4. Examples continued  Ex 2: Michigan can produce 200 automobiles each day or produce 500 oranges each day. Florida can produce 25 autos each day or produce 5000 oranges each day.  Who has the absolute advantage in producing oranges?  Who has the absolute advantage in producing autos?

5.  Absolute advantage is one of the reasons we have trade.  It makes sense to have certain states or countries produce goods based on resources and climate.  Then states or countries can trade goods to maximize resources.

6. Comparative Advantage  Comparative advantage – ability of a country to produce a product at a lower opportunity cost than another country

7. example  Example 1: Two men are stranded on a desert island. One is young and strong, while the other is old and weak. They must fish, carry water, cook, and make shelter to survive. The young man has the absolute advantage in every activity.  Should the young man do everything since he is better at every activity?

8.  No. They should work together because it benefits both of them. The old man should perform the activities that he is only slightly worse at. He would have a comparative advantage in those activities.

9. Example  Example 2: Lou and Terry want to start a summer business. Lou is in better shape and can mow 6 lawns or rake 3 lawns per hour. Terry can mow 5 lawns or rake 1 lawn per hour. RakeMow Lou36 Terry15 (Lou 1 Rake=6/3[2] Mow and 1 Mow=3/6[.5] Rake) (Terry 1 Rake=5/1[5]Mow and 1 Mow=1/5[.2] Rake  Lou has the absolute advantage in both jobs.  Which job should each boy perform to maximize productivity?

10.  In 1 hour Lou could mow 6 lawns while Terry raked 1.  Or Terry could mow 5 lawns while Lou raked 3.  Clearly, the 2 nd choice would be better. Therefore, Terry has the comparative advantage in mowing lawns while Lou has the comparative advantage in raking.

11.  When you look at comparative advantage, it always makes sense to think that each person, or country should specialize in 1 thing. So look at both scenarios to see which produces more.

12. Last Example  Ex 3: England can produce 60 million pounds of corn or 50 million pounds of potatoes. France can produce 30 million pounds of corn or 40 million pounds of potatoes. PotatoesCorn England5060 France4030  Who has the comparative advantage in producing each product?