1.3 Comparative and Absolute Advantage/Terms of Trade

Absolute Advantage

• Exists when a person/nation can produce more of a certain good/service than someone else in the same amount of time

• Who can produce more?

Comparative Advantage

• Exists when a person/nation can produce a good/service at a lower opportunity cost than someone else in the same amount of time/resources

• Who has the LOWER opportunity cost?

  • = more efficient

Input problems

an INPUT problem presents the data as amount of resources needed to produce a fixed amount of output.

• ex. # of labor hours to produce 1 pen

• When identifying abs. adv., input problems want who can produce using the least amount of resources

IOU - Input: Other goes Under

Output problems

an OUTPUT problem presents the data as products produced given a set of resources.

• ex. Number of pens produced

OOO - Output: Other goes Over

Specialization

• A country focuses on producing 1 good to gain greater efficiency

  • ex. USA producing ONLY Wheat

• Countries can be made better off if they will produce goods they have a comparative advantage in and then trade with others for whatever else they want/need

• Countries should trade if they have a relatively LOWER opportunity cost

• They should specialize in the good that is “CHEAPER” for them to produce (costs less labor/resources)

Terms of Trade

• Fair Trade Agreement - agreed upon condition that would benefit both countries

will need to answer if both countries benefit on quizzes/tests