1. Absolute vs. Comparative

2. Definitions Absolute Advantage= the product or resource that a person, group, or society can produce more of (absolutely). Comparative Advantage= the product or resource that a person, group, or society can produce at the least possible cost.

3. Why Comparative Advantage? David Ricardo Says…Specialization. Economies or Indiviuals are better off finding their comparative advantage and specializing in that good, and then trading with other countries or people specialized goods.

4. Calculating the Comparative Advantage: United StatesVietnam Shrimp10002000 Computers20001000 Step 1: Find the cost of producing just 1 unit of each good

5. Calculating the Comparative Advantage: United StatesVietnam Shrimp10002000 Computers20001000 USVietnam 1 shrimp= 2 comp1 shrimp= ½ comp 1 comp.= ½ shrimp1 comp.= 2 shrimp

6. Calculating the Comparative Advantage: The US has the Comparative Adv. in ____ Vietnam has the Comparative Adv. in ___ What does this mean? The U.S. will specialize in making computers and trade with Vietnam for shrimp and vice versa. In the long run both countries will be better off for specializing. United StatesVietnam Shrimp10002000 Computers20001000 US Vietnam 1 shrimp= 2 comp1 shrimp= ½ comp 1 comp.= ½ shrimp1 comp.= 2 shrimp

7. What’s a good trade? Terms of Trade: Trade that will be mutually advantageous for both countries. Look back at the cost involved in producing shrimp and computers for each country. USVietnam 1 shrimp= 2 comp1 shrimp= ½ comp 1 comp.= ½ shrimp1 comp.= 2 shrimp

8. Terms of Trade USVietnam 1 shrimp= 2 comp1 shrimp= ½ comp 1 comp.= ½ shrimp1 comp.= 2 shrimp What would be a trade that would help both countries exceed their Production Possibilities Frontier? ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp

9. Terms of Trade ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp Would 750 shrimp from Vietnam for 1250 computers from the U.S. be an acceptable trade for both groups? Well…

10. Terms of Trade 1 shrimp = 1 2/3 computers 1 computer = 6/10 shrimp Does it work? ½ comp.<1 shrimp<2 comp. ½ shrimp < 1 comp.< 2 shrimp YES!!