AP Macroeconomics

1. AP Macroeconomics Comparative Advantage

2. Ricky Ricardo • Lucy’s Cuban-American husband drumming on the bongo.

3. David Ricardo • English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.

4. Absolute Advantage v. Comparative Advantage • Absolute Advantage • Faster, more, more efficient, given same resources/inputs • Comparative Advantage • Lower opportunity cost

5. Specialization • Producing according to comparative advantage

6. Example • Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what. • Other goes over

7. Example

8. Example Who has the absolute advantage in baking cakes? Who has the absolute advantage in making pizza?

9. Example Why? Because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

10. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

11. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

12. Example Why? Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake. Remember OGO. OTHER goes over. If we’re looking at comparative advantage to make cakes, make a fraction with pizza as the numerator. If we’re looking at comparative advantage to make pizzas, make a fraction with CAKE as the numerator.

13. Example Furthermore, it only cost David 1/3of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.