Comparative Advantage and Globalization

1. Comparative Advantage and Globalization • BIG IDEA – When regions and nations use comparative advantage to produce at the lowest cost and then trade with others,……………increase. • production, consumption and interdependence

2. Explain?

3. ???????

4. What does this mean? • Comparative advantage of regions and nations exists when they can produce goods or services at a …. • lower opportunity cost than other individuals or nations. • Specializationin the production of the good or service at a lower cost ……trade with others • increases • Discuss / Give ex’s of SPECIALIZATION

5. Why? • Countries have different …… • natural, human, and capital resources • Countries have different ways of combining these resources = not all countries are equally ….. at producing the goods and services that their residents demand • efficient

6. Given the choice of producing one good or another, it is ……to produce the good with the….. • more efficient ; lower opportunity cost • This allows theincreased production of that good to …..for the good with the…… • trade ; higher opportunity cost

7. Tim’s OC of 1 cookie = 8 papers / 4cookies = 2 papers …so for every 1 cookie Tim makes, he gives up the opportunity to write 2 otermpaper Jane’s OC of 1 cookie = 3 papers / 12 cookies = 1/4 paper …so for every 1 cookie Jane makes, she gives up the opportunity to write ¼ of term paper Let’s Practice Jane Tim So we conclude that …… Jane has the lower OC of … making cookies…..so…… Jane has the ……. Comparative Advantage in making cookies So Jane should specialize in making cookies and Tim should….. Specialize in writing term papers Then they can trade

8. Your Turn? So we conclude that …… Tim has the lower OC of … Writing papers…..so…… Tim has the ……. Comparative Advantage in writing papers • Figure out Jane and Tim’s OC of writing a term paper: Tim’s OC of 1 paper = 4 cookies / 8 papers = 1/2 cookie …so for every 1 paper Tim writes, he gives up the opportunity to make ½ cookie Jane’s OC of 1 paper = 12 cookies/3 papers= 4 cookies …so for every 1 paper Jane writes, she gives up the opportunity to make 4 cookies So Tim should specialize in writing papers and Jane should….. Specialize in making cookies Then they can trade

9. Absolute Advantage • Absolute advantage occurs when a country can produce ….. that another country can • more of a good with the same resources • Give ex’s • If the 2nd country has an absolute advantage in producing a good that the first country …. , both will be better off if they …….. • wants ; specialize and trade

10. Why Trade? • Considered a “win-win” situation • Usually………, even if one has an absolute advantage in the production of …….. • beneficial to both countries ; both goods that are to be traded

11. Terms of trade must be such that both countries lower the opportunity costs of the goods they are getting from the trade • If both countries don’t ….., then they ……..in voluntary trade • gain ; wouldn’t engage

12. Why do countries have different opportunity costs? • Different endowments (amounts) of productive resources – climates, growing seasons, plentiful natural resources, levels of education and skill, quantities of sophisticated machinery

13. World Trade is not static • Has been increasing in amount and significance • Discovery of new….. • natural resources • Better management of existing supplies • Better education programs = improved human resources • Results • more efficient use of scarce resources • higher standards of living

14. Overview • One individual who can outperform another individual in every way may nevertheless be able to work out an advantageous trade or exchange with the less-competent person

15. Although the efficient person may be absolutely superior at everything (……) • (absolute advantage), • the less-efficient person may be able to perform relatively better at some particular thing (…….) • (comparative advantage) and therein lies the potential for advantageous exchange

16. The concept of comparative advantage forms the basis for …… • voluntary exchange • between individuals, as well as the basis for …… • international trade