4. Comparative Advantage and Trade

7/29/2019 4. Comparative Advantage and Trade

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Econ 101 M. Salemi

Comparative Advantage and Trade

Review

More on Production Possibilities

Inside, On and Outside the PPF


To take advantage of the benefits ofspecialization people must trade.

Why are free trade proposals controversial?

What have we learned?

Econ 101 M. Salemi

Review

The Principle of Comparative Advantage says thateveryone does best when each person (or eachcountry) concentrates on the activities for whichhis or her opportunity cost is the lowest.

The production possibilities graph describes themaximum amount of one good that can beproduced for every possible level of production

of the other good.

Econ 101 M. Salemi

Review

Ari and Sam must write aclass report with charts.In one hour

Ari can write 300 words ormake 3 charts.

Sam can write 200 wordsor make 1 chart.

Ari should Chart.

Sam should write.

Cost of100

Words

Cost ofOneChart

Ari 1 Chart 100Words

Sam Chart 200Words


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Econ 101 M. Salemi

Ari and Sam J oint

Production Possibilities Frontier

0

4

8

12

16

20

24

28

32

0 4 8 12 16 20 24 28 32 36 40

100's of Words

Charts

Ari specializes in charts,

Sam splits her time.

Sam specializes in words,

Ari splits her time.

The Frontier

Econ 101 M. Salemi

Use Your Clickers To AnswerThe Following

Graded Question

Econ 101 M. Salemi

Which of the following best explains theconnection between the principle of comparativeadvantage and Ari and Sams ProductionPossibilities Frontier (PPF)?

A. Sam and Ari are inside the PPF unless Samspends all her time writing.

B. Sam and Ari are inside the PPF unless Samspends all her time charting.

C. The steeper slope of the PPF occurs when theopportunity cost of written words decreases.

D. The steeper slope of the PPF occurs when Aribegins to write instead of to chart.

Econ 101 M. Salemi

Review Survivors

Four survivors arestuck on anisland. Eachcan either fishor gatherberries. Thefollowing tableshows whateach survivorcan produce ina day.

Jean Joe Jerry Jack

Fish

(lbs) 4 3 2 1

Berries

(lbs) 1 2 3 4


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Econ 101 M. Salemi


Non-Graded Question

Econ 101 M. Salemi

Review Survivors

Given the survivorsproduce 6 lbs of fishefficiently, what is theiropportunity cost for 1pound of fish?

A. 1/4 pound of berriesB. 2/3 pounds of berriesC. 1.5 pounds of berriesD. 4 pounds of berries

Jean Joe Jerry Jack

Fish

(lbs) 4 3 2 1

Berries

(lbs) 1 2 3 4

Econ 101 M. Salemi

What are theProduction Possibilities

Availableto the Survivors

Given Their Individual Skills?

Anna Mullens Winning Entry

Jerry

Jean


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Econ 101 M. Salemi

Survivors' PPF

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Pounds of Berries

PoundsofFish

J ackie

J erry

J oe

J ean

Whose Cost Definesthe Survivors'

Opportunity Cost?

Econ 101 M. Salemi

InsideOutsideand On

The Production PossibilitiesFrontier

Econ 101 M. Salemi

Inside the PPF Resources areUnder Employed.

Survivors' PPF

0

2

4

6

8

10

0 2 4 6 8 10

Pounds of Berries

PoundsofFish

Points Inside the PPF Result FromUnderemployment of Resources

Econ 101 M. Salemi

Outside the PPF Is Not Possible

Survivors' PPF

0

2

4

6

8

10

12

0 2 4 6 8 10 12

Pounds of Berries

PoundsofFish

Points Outside the PP Fare Not Attainable


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Econ 101 M. Salemi

Economic Growth ProvidesMore or Improved Resources andShifts the PPF Toward Higher Levels of Output

What happens tothe PPF of thesurvivors ifthey discover afifth survivorwho canproduce either3 lbs of fish or2 lbs of berriesper day?

Jean Joe Jerry Jack

Fish

(lbs) 4 3 2 1

Berries

(lbs) 1 2 3 4

Econ 101 M. Salemi

To BenefitFrom

SpecializationPeople

Must Trade.

Econ 101 M. Salemi


Both Kansas and California can produce beef cattleand grapes. Assume the value of labor andother needed inputs is the same per acre ineach state and for each product.

In Kansas an acre of land can be used to produce300 pounds of beef or 100 pounds of grapes.

In California, and acre of land can be used toproduce 150 pounds of beef or 200 pounds of

grapes.

Econ 101 M. Salemi


Graded Question


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Econ 101 M. Salemi

In Kansas: 300 lbs of beef or 100 lbs of grapes.In California: 150 lbs of beef or 200 lbs of grapes.

Which of the Following is Correct?

A. California has a comparative advantage in grapeproduction because its opportunity cost of grapes islower.

B. California has a comparative advantage in grapeproduction because its opportunity cost of grapes ishigher.

C. Kansas has a comparative advantage in grapeproduction because its opportunity cost of grapes islower.

D. Kansas has a comparative advantage in grapeproduction because its opportunity cost of grapes ishigher.

Econ 101 M. Salemi


The cost of producing a lb. of grapes in Kansas is 3lbs. of beef.

Kansas will be better off specializing in beef, if itcan buy grapes for less than 3 lbs. of beef.

The cost of producing a lb. of grapes in California is lbs. of beef.

California will be better off specializing in grapes ifit can sell grapes for more than lbs. of beef.

Econ 101 M. Salemi


Both Kansas and California will respond tothe price of grapes and beef.

The optimal response will depend on therelative price of grapes and beef.

Decision makers in both states will askwhether it is better to obtain goods by

producing them or by trading for them.

Econ 101 M. Salemi


How Kansas and CaliforniaRespond to the Price of Grapes

0

0 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4

Price of Grapes Measured in Pounds of Beef

Kansas P roduces Beef and BuysGrapes

KansasProducesGrapes

California Produces Grapes and BuysBeef

CaliforniaProduces

Beef


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Econ 101 M. Salemi

Suppose the price of a pound of grapes

Is 1.5 pounds of beefThe Effects of Specialization on Kansas

0

50

100

150

200

0 50 100 150 200 250 300

Lbs. of Beef per Acre

Lbs.ofGrapes

Kansas ProductionPossibilities

Kansas Opportunities if itSpecializes in Beef and

Trades for Grapes

Econ 101 M. Salemi


If the benefits of trade

are so great,

why is free trade

so controversial?

Econ 101 M. Salemi

CAFTA Protests

Econ 101 M. Salemi

March 13, 2005Thousands of Hondurans demonstrated acrossthe country on March 8 to protest the NationalCongress's March 3 vote for the Central AmericanFree Trade Agreement (CAFTA). The protestswere organized by the Popular Resistance, whichestimates that CAFTA will drive 300,000campesino families out of business, forcing800,000 Hondurans into unemployment. Some2,000 people marched in Tegucigalpa fromObelisk Park to the Congress building, chanting:"With this new treaty you've murdered thepeople.

[Tiempo (San Pedro Sula) 3/9/05].


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Econ 101 M. Salemi

Why is free trade controversial?

Reducing barriers to international tradeincreases the total value of goods andservices produced in each nation.

But

It does not guarantee that each individualcitizen does better when the barriers arereduced.

Econ 101 M. Salemi


Graded Question

Econ 101 M. Salemi

Suppose the U.S. restricts importsof steel pipe. Who wins?

A. U.S. construction firms win because theyare guaranteed high quality pipe.

B. U.S. steel producers win because theycan sell pipe at a higher price.

C. U. S. construction firms win becausethey can buy pipe at a lower price.

D.Foreign steel producers win becausethey can sell pipe at a higher price.


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Econ 101 M. Salemi


Inside the PPF, there is unemployment orunderemployment.

On the PPF, there is full employment.

To take advantage of the benefits ofspecialization people must trade.

Free trade is controversial because freetrade creates losers as well as winners.

4. Comparative Advantage and Trade

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