1. Lesson 2Macroeconomics – Unit 1

2. Adam Smith What were Smith’s 2 revolutionary ideas in economics? 1. 2. That by each acting in our own self- interest, our economy is best served. Specialization in production greatly increases productivity.

3. David Ricardo 1772-1823 What was David Ricardo’s revolutionary idea in economics? One country should still trade with another country even though it is a better producer of everything.

4. Define Comparative Advantage One entity can produce something at a L_________ M________ O____________ P____________ C________ than another entity. One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity.

5. In previous comparative advantage problems, we looked at how long it took a country to produce something. Now we’ll look at it differently called total production.

6. Using all of their resources efficiently Singapore and South Korea can produce sewing machines and dryers as follows: Singapore South Korea sewing machines2015 dryers6025 Which country should produce dryers and which sewing machines?

7. To determine which country has the comparative advantage, we must determine opportunity cost. That is we must determine what it costs a country to produce a “dryer” instead of a “sewing machine.” Singapore South Korea sewing machines2015 dryers6025

8. Singapore: what is the cost of 1 sewing machine? Singapore South Korea sewing machines20 15 dryers6025 Every time Singapore makes 1 sewing machine it gives up _____ dryers? Can you see the ratio? 1:3

9. If you can’t see the ratio, try this: You want to know the cost of 1 sewing machine, so reduce sewing machines to 1. Singapore South Korea sewing machines20 15 dryers60 25 Then reduce dryers by the same number. / 20 = 1 / 20 = 3 The cost of 1 sewing machine is 3 dryers.

10. What’s the cost of 1 sewing machine in South Korea? Singapore South Korea sewing machines 2015 dryers 60 25 / 15 = 1 / 15 = 1 2/3 The cost of 1 sewing machine in South Korea is 1 2/3 dryers.

11. Now compare the costs of sewing machines in the 2 countries and determine who should produce them. Singapore South Korea sewing machines 20 15 dryers 60 25 / 20 = 1 / 20 = 3 / 15 = 1 / 15 = 1 2/3 Who should produce sewing machines…that is….for which country is it cheaper? South Korea

12. The cost of 1 shirt = ___ tennis shoes Guatemala El Salvador shirts4520 tennis shoes156 Gautemala The cost of 1 tennis shoe = ___ shirts The cost of 1 shirt = ___ tennis shoes El Salvador The cost of 1 tennis shoe = ___ shirts 1/3 3 3 1/3 3/10

13. The cost of 1 mirror = ___ rug GhanaMorocco mirrors2410 rugs62 Ghana The cost of 1 rug = ___ mirrors The cost of 1 mirror = ___ rug Morocco The cost of 1 rug = ___ mirrors 1/4 4 5 1/5

14. The cost of 1 mirror = ___ rug How do you double-check to make sure you’ve done the math correctly? Ghana The cost of 1 rug = ___ mirrors The cost of 1 mirror = ___ rug Morocco The cost of 1 rug = ___ mirrors 1/4 4 5 1/5 Look for reciprocals.

15. Be careful: Read each problem to determine – (1) is this telling me number of labor hours or resources needed to produce ……or (2) is this telling me total production? The analysis is different!

16. Also for those comparative advantage questions that are examining output, the data may be presented to you graphically. Assume that two countries have the resources that permit them to produce cars and tractors as shown above. Cars Tractors 1040 20 30 Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q

17. You can convert the graphic data into a chart to answer the questions. AtlantisXanadu Cars Tractors 1040 20 30 Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q cars tractors 30 10 20 40

18. Absolute Advantage means…… that a particular entity can produce more of a specific commodity than another entity using the same amount of resources.

19. Comparative Advantage means …… that a particular entity can produce a specific commodity at a lower marginal opportunity production cost than another entity. l m o p c the end!

20. working with a partner AP Workbook, p. 13-14, B. 4. You will turn in this paper for a classwork grade. classwork assignment: 15 min

21. Steven Reff AP Instructor Economics Educator Pueblo High School Tucson, AZ “I can’t teach everyone.”