2.01 Understand the concept of comparative advantage and global factors of production
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2.01 Understand the concept of comparative advantage and global factors of production
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2.01 Understand the concept of comparative advantage and global factors of production. A Rice Culture. Rice grown in Japan Grown on small farms Japanese consumers pay up to 7x more than US consumers Multiple uses of rice (clothing, mats, & household items) Japanese government subsidies - PowerPoint PPT Presentation
Transcript of 2.01 Understand the concept of comparative advantage and global factors of production
2.01 Understand the concept of comparative advantage and
global factors of production
A Rice Culture
Rice grown in JapanGrown on small farmsJapanese consumers pay up to 7x more
than US consumersMultiple uses of rice (clothing, mats, &
household items)Japanese government subsidiesPowerful farmers’ lobby700% tariff on imported rice
Economic theories Absolute advantage - a country can produce more
units of a product at a lower cost using fewer resources than other countriesEx) US - absolute advantage over Japan in rice & cotton
production, can produce at lower price per unit than JapanEx) US - absolute advantage over France in cheese
production; can produce at lower price per unit than FranceEx) Canada - absolute advantage with lumber production;
can produce at lower price than other countriesEx) China - absolute advantage over the US in toy
production; can produce at lower price than US
Economic theories (con’t) Comparative advantage - a country should specialize in the
production of a product that it can produce relatively better, or more efficiently than other countriesMore efficiently includes being able to produce product with lower
opportunity costEx) Japan – comparative advantage over US producing rice, can
produce more efficiently with lower opportunity cost than USEx) US - comparative advantage over Japan producing cotton, can
produce more efficiently with lower opportunity cost than JapanEx) Brazil - comparative advantage over US producing coffee; can
produce more efficiently with lower opportunity cost than UShttp://www.youtube.com/watch?v=Pd_qs8ueIWwhttp://www.youtube.com/watch?v=Vvfzaq72wd0Two you-tube videos on absolute & comparative advantages
Economic theories (con’t) Production possibility curve - a hypothetical
representation that shows tradeoff in production shifting resources between 2 products
• Producing more of 1 product reduces production on other
• Tradeoff slope represents opportunity cost
• http://www.youtube.com/watch?v=uWwrb--yk-w&feature=related
• Production possibility curve video
Economic theories (con’t)Opportunity cost - value of what is given up in
producing 1 product when another is producedEx) Japan - more efficient producing rice than cotton;
focuses more resources on riceEx) US - more efficient at producing cotton than rice;
focuses more resources on cottonhttp://www.investopedia.com/video/play/opportunity-cost
/Opportunity cost video
Economic theories (con’t)Commodity - raw material or agricultural product that
may be same regardless of who produces itEx) Oil from Saudi Arabia - just as valuable as oil from
VenezuelaEx) Rice from US, Japan or Thailand – viewed same by most
western consumers
Global factors of production A country’s comparative advantage comes from its
global factors of production. The US has available resources in all factors of production
1. Natural resources - includes land, forests, minerals, oil, & bodies of water
Many African countries rich in gold, diamonds & other minerals
Saudi Arabia, Libya, Iraq & Venezuela - rich in oil.US rich in farmland, fresh water &natural gas.
Global factors of production2. Human resources - (or labor) includes workers,
management & entrepreneursDeveloped countries such as Japan, Germany, UK & US
rich in skilled labor & management expertiseChina rich in low-cost labor
Global factors of production3. Capital resources - (or man-made items) includes
buildings, machinery & fundsDeveloped countries such as Japan, Germany, UK & US
rich in capital; funds to invest in infrastructure, business ventures.
Underdeveloped countries such as Guatemala, Liberia & Nepal lack capital to invest in infrastructure & business ventures
Comparative advantage of nationsCountry’s industries develop through strong internal
competition Ex) Coke vs. Pepsi; AT&T vs. Verizon
Japanese companies - comparative advantage in producing small home electronic devices such as TVs & cameras
US -comparative advantage in entertainment industry, exporting movies & TV shows Ex) Disney exports theme park management skills to Japan,
Hong Kong, etc.Only the strongest & best producers survive
