Comparative : The asis for Exchange Absolute One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person Chapter 2: Comparative : The asis for Exchange Slide 2 Comparative One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person s opportunity cost Chapter 2: Comparative : The asis for Exchange Slide 3 1
Should Paula update her own web page? Paula eth Time to update web page Time to complete bicycle repair 2 minutes 1 minutes 3 minutes 3 minutes Chapter 2: Comparative : The asis for Exchange Slide 4 Should Paula update her own web page? Paula eth Opportunity Cost of updating a web page Opportunity Cost of a bicycle repair 2 bicycle repairs.5 web page updates 1 bicycle repair 1 web page update Chapter 2: Comparative : The asis for Exchange Slide 5 Should Paula update her own web page? How many web pages and bicycle repairs can Paula and eth produce a day if they both work eight-hour days? Chapter 2: Comparative : The asis for Exchange Slide 6 2
If they split their time evenly and produce 16 web pages Paula eth Total Web Pages Total 16 icycle Repairs 24 4 16 36 Chapter 2: Comparative : The asis for Exchange Slide 7 If they specialized in their comparative advantage Web Pages Paula eth 16 Total 16 icycle Repairs 4 4 16 4 Chapter 2: Comparative : The asis for Exchange Slide Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest Chapter 2: Comparative : The asis for Exchange Slide 9 3
Sources of Comparative Individual Inborn talent Education Training Experience Chapter 2: Comparative : The asis for Exchange Slide 1 Sources of Comparative National Level Natural resources Cultural institutions Chapter 2: Comparative : The asis for Exchange Slide 11 The Curve A graph that describes the maximum amount of one good that can be produced for every possible level of production of another good. Chapter 2: Comparative : The asis for Exchange Slide 4
The Curve Assume A small economy that o Produces only two goods - coffee and nuts o Has only one worker who works 6 hrs/day Chapter 2: Comparative : The asis for Exchange Slide 13 Susan s 24 A Opportunity Cost (OC) 1. OC nuts = Loss in coffee/gain in nuts 2. OC coffee = Loss in nuts/gain in coffee 16 C Curve: All combinations of coffee and nuts that can be produced with Susan s labor 4 D Chapter 2: Comparative : The asis for Exchange Slide 14 Susan s 24 A 16 The scarcity principle: Having more of one good generally means having less of another good. C 4 D Chapter 2: Comparative : The asis for Exchange Slide 15 5
Attainable and Efficient Points on Susan s 24 A 16 Combination F: Unattainable Combination E: Inefficient C 4 D Combinations A,, C, and D: Efficient Chapter 2: Comparative : The asis for Exchange Slide 16 The Curve Attainable Point Any combination of goods that can be produced using currently available resources Unattainable Point Any combination that cannot be produced using currently available resources Chapter 2: Comparative : The asis for Exchange Slide 17 The Curve Efficient Point Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other Chapter 2: Comparative : The asis for Exchange Slide 1 6
The Curve Inefficient Point Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other Chapter 2: Comparative : The asis for Exchange Slide 19 Tom s Tom s Curve for a 6 hour day A Tom s Curve: All combinations of coffee and nuts that can be produced with Tom s labor 4 C D 16 24 How Individual Productivity Affects the Slope and Position of the Curve Chapter 2: Comparative : The asis for Exchange Slide 2 Individual Production s Compared Susan has an absolute and comparative advantage in picking coffee 24 Susan s Production Tom has an absolute and comparative advantage in picking nuts Tom s Production 24 Chapter 2: Comparative : The asis for Exchange Slide 21 7
Production Without Specialization Tom s Output = 2 hrs picking nuts = lbs 4 hrs picking coffee = lbs 24 Susan s Production Susan s Output = 2 hrs picking coffee = lbs 4 hrs picking nuts = lbs Tom s Production Total Output = 16 lbs each 24 Assume: Susan and Tom allocate their time so each person s output is half nuts and half coffee Chapter 2: Comparative : The asis for Exchange Slide 22 Production With Specialization Tom s comparative advantage is in nuts so he specializes in nuts and produces 24 lbs 24 Susan s Production E Susan gives Tom lbs of coffee for lbs of nuts Susan s comparative advantage is in coffee so she specializes in coffee and produces 24 lbs Tom s Production 24 Chapter 2: Comparative : The asis for Exchange Slide 23 Comparative and The gains from specialization grow larger as the difference in opportunity cost increases For Example Susan: 5 lb coffee/hr 1lb nuts/hr Tom: 1 lb nuts/hr 5 lb coffee/hr Chapter 2: Comparative : The asis for Exchange Slide 24
Comparative and The gains from specialization grow larger as the difference in opportunity cost increases Without Specialization Tom: 5 hrs coffee = 5 lb 1 hr nuts = 5 lb Susan: 1 hr coffee = 5 lb 5 hrs nuts = 5 lb Total: 1 lb 1 lb Chapter 2: Comparative : The asis for Exchange Slide 25 Comparative and The gains from specialization grow larger as the difference in opportunity cost increases With Specialization Tom: 3 lb coffee lb nuts Susan: lb coffee 3 lb nuts Total: 3 lb 3 lb Chapter 2: Comparative : The asis for Exchange Slide 26 Curve For a Large Economy (1s of lb/day) Assume: An economy that produces only two goods, coffee and nuts 1 95 9 A C Why would the Production have an outward bow? 2 15 D E 2 3 75 77 (1s of lb/day) Chapter 2: Comparative : The asis for Exchange Slide 27 9
The Principle of Increasing Opportunity Cost ( The Low-Hanging-Fruit Principle ) In expanding the production of any good, first employ those resources with the lowest opportunity costs, and only afterward turn to resources with higher opportunity costs Chapter 2: Comparative : The asis for Exchange Slide 2 Economic Growth: An Outward Shift in the Economy s PPC (1s of lb/day) Factors Shifting the PPC 1. Increases in productive resources (i.e., labor or capital) New PPC 2. Improvements in knowledge and technology Original PPC (1s of lb/day) Chapter 2: Comparative : The asis for Exchange Slide 29 Factors That Shift The Economy s Curve Increasing Productive Resources Investment in new factories and equipment Population growth Improvements in Knowledge and Technology Increasing education Gains from specialization Chapter 2: Comparative : The asis for Exchange Slide 3 1
Factors That Shift The Economy s Curve Why have countries Like Nepal been So slow to specialize? Low population density Isolation Some factors that may limit specialization in other countries Laws Customs Chapter 2: Comparative : The asis for Exchange Slide 31 International Trade Economic Naturalist If trade between nations is so beneficial, why are free-trade agreements so controversial? Chapter 2: Comparative : The asis for Exchange Slide 32 End of Chapter 11