1. First edition Global Economic Issues and Policies PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western/Thomson Learning. All rights reserved. Chapter 2 Comparative Advantage— How Nations Can Gain From International Trade

2. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–2 1.What are a nation’s production possibilities, and what do they tell us about the costs of producing goods and services within that nation? 2.What is absolute advantage, and how can it help explain why nations engage in international trade? 3.Why is absolute advantage alone insufficient to account for trade among nations? 4.What is comparative advantage, and how does it allow countries to experience gains from trade?

3. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–3 5.Why, in spite of its benefits, does international trade ebb and flow and create so much controversy within the world’s nations?

4. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–4 The Economics of “Going It Alone” Production Possibilities  All possible combinations of total output of goods and services that residents of a nation can produce given currently available technology and resources. Opportunity Cost  The highest-valued, next-best alternative that must be sacrificed to obtain an item. Consumption Possibilities  All possible combinations of goods and services that a nation’s residents can consume.

5. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–5 Table 2-1 Northland’s Production Possibilities

6. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–6 Figure 2-1 Northland’s Production Possibilities Frontier

7. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–7 Absolute Advantage—Do Big Countries Have an Upper Hand? Absolute Advantage  The ability of a nation’s residents to produce a good or service at lower cost, measured in resources required to produce the good or service.  The ability to produce more output from given inputs of resources, as compared with other nations.

8. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–8 Absolute Advantage as a Basis for Trade? Production Specialization and Trading Based on Absolute Advantage  Countries potentially can consume more goods and services than they could otherwise. Production and Trading That Occurs When No Absolute Advantage Exists  Differences in internal opportunity costs are likely to be fundamental determinants of whether countries can gain from trading goods and services with other nations.

9. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–9 Table 2-2 Weekly Production in Northland and West Coast without Specialization Table 2-3 Weekly Production in Northland and West Coast with Specialization

10. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–10 Table 2-4 Production Possibilities in Northland and West Coast

11. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–11 Table 2-5 Weekly Production in Northland and Southsea without Specialization

12. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–12 Comparative Advantage—Why Trade Benefits Nearly Everyone Comparative Advantage  The ability of a nation’s residents to produce an additional unit of a good or service at a lower opportunity cost relative to other nations. Gains From Trade  Additional goods and services that a nation’s residents can consume, over and above the amounts that they could have produced within their own borders, as a consequence of trade with residents of other nations.

13. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–13 Table 2-6 Production Possibilities in Northland and Southsea

14. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–14 Figure 2-2 Production Possibilities Frontiers for Northland and Southsea

15. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–15 Why Trade Is Not a Clear-Cut Issue Gains From Trade Can Be Fleeting  Other nations develop a comparative advantage in producing close substitutes for traded goods.  Other countries develop greater capabilities to produce the same good or service.  Opportunity costs of producing goods or services can change as technological innovations and changes in resources make one good or service less expensive to produce relative to another.

16. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–16 Why Trade Is Not a Clear-Cut Issue (cont’d) Gains From Trade Can Be Fleeting (cont’d)  Redistributive effects of trade create altered allocations of incomes among a nation’s residents as a result of changes in international trade flows.

17. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–17 Questions and Problems - 1)

18. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–18 Questions and Problems - 2)

19. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–19 Questions and Problems - 3)

20. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–20 Questions and Problems - 4)

21. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–21 Questions and Problems - 5)

22. Copyright © 2004 South-Western/Thomson Learning. All rights reserved.2–22 Questions and Problems - 6)