module comparative advantage and trade krugman's macroeconomics for ap* 4 margaret ray and...
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ModuleComparativeAdvantage and Trade
KRUGMAN'SMACROECONOMICS for AP*
4
Margaret Ray and David Anderson
HousekeepingHousekeeping
Read Module 4 – do C/U and tackle the test.
Quiz early next week on comparative advantage.
What you will learnWhat you will learn
in thisin this ModuleModule::
• How trade leads to gains for an individual or an economy
• The difference between absolute advantage and comparative advantage
• How comparative advantage leads to gains from trade in the global marketplace
Why do nations trade?Why do nations trade?
????
Why do Nations Trade?Why do Nations Trade?
• Specialization leads to….
• Gains from trade
PROVE IT!
Absolute AdvantageAbsolute Advantage
States Apples Timber
Oregon 10 40
Washington 40 10
Oregon WashingtonApples Apples
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 50 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40
Timber Timber
Pairs – What would you do?Pairs – What would you do?
• One player - OR
• Other player - WA
Terms of Trade
1 apple
for
1 timber
Absolute AdvantageAbsolute Advantage
States Apples Timber
Oregon 40(20)
Washington 40(20)
20
20
Gains from TradeGains from Trade
States Apples Timber
Oregon 5 to 20 20
Washington 20 5 to 20
Total 25 to 40
25 to 40
Oregon WashingtonApples Apples
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40
Timber Timber
Absolute AdvantageAbsolute Advantage
Country has an absolute advantage when it can produce more of a good than other countries with the same amount of resources.
Comparative AdvantageComparative Advantage
Lawn mowing example:
Lawn Mowing
Comparative AdvantageComparative Advantage
Comparative advantage arises because two parties have different opportunity costs.
Should WA Trade?Should WA Trade?
States Apples Timber
Oregon 10 40
Washington 50 50
Oregon WashingtonApples Apples
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 50 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 45 50
Timber Timber
Pairs – What would you do?Pairs – What would you do?
• One player - OR
• Other player - WA
Terms of trade
2 timber for 1 apple
Should WA Trade?Should WA Trade?
States Apples Timber
Oregon 40(20)
Washington 50(40)
20
10
Oregon WashingtonApples Apples
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 45 50
Timber Timber
Terms of tradeTerms of trade
Terms of trade is the amount of one product exchanged for another expressed as a ratio. This ratio will lie between the opportunity costs for each trading partner.
Summary of Key ConceptsSummary of Key Concepts
• Absolute Advantage
• Comparative Advantage
• Terms of Trade
Fish and ChipsFish and Chips
Chips Fish Chips Fish Chips Fish Chips FishUK 25 50 50 25 40USA 15 20 80 25 40
Total 40 70 50 80 50 80 0 0
Terms of trade FishChips 25
No trade Specialization Export 1/2 ?
40
More PracticeMore Practice
• NZ and Spain
• China and USA
Input Oriented ProblemsInput Oriented Problems
Hrs / product
Donuts Coffee
Livingston 8 4
Montclair 24 8
Absolute advantage?Comparative advantage?
Gains from trade?
Convert input questions into Convert input questions into opportunity costs.opportunity costs.
Hrs / product
Donuts Coffee
Livingston 1unit 2 units
Montclair 1 unit 3 units
Montclair has a comparative advantage in coffee, and Livingston has one in donuts.