AP Micro 2.4 Comparative Advantage and Trade

COMPARATIVE ADVANTAGE, SPECIALIZATION, AND GAINS FROM TRADE

Comparative Advantage: If producer A has a cheaper opportunity cost for plates, they have the comparative advantage in plates relative to producer B

Absolute Advantage: Ability to produce more of a given product than someone else with the same input (Time, employees, etc.). Compares how many plates someone produces vs another country

Specialization: If you are disproportionately better at producing one product, then you are specialized. This can be used to make gains from trade. Who should specialize? Whichever producer has the best COMPARATIVE ADVANTAGE

Gains From Trade: If you have 2 products and producer A is specialized in producing product 1, and producer B is specialized in producing product 2, then they can both produce their respective specialties and trade assuming they want each others’ product. Anything cheaper than their opportunity cost for their non-specialty, will get outcomes better than their Production Possibilities Frontier and previously deemed unattainable.

TERMS OF TRADE AND THE GAINS FROM TRADE

Selling Price: A net positive would be anything greater than their O.C.

Buying Price: A net positive would be anything less than their O.C.

Trading under ^^ parameters will result in a point outside of the PPF

WHEN THERE AREN’T GAINS FROM TRADE

Purely Logistically, Anytime O.C. are equal between producers.

Other reasons: Interest, desire, need, etc.

EXAMPLE
What would be a trading price that Kalos and Johto would agree on to trade charms for?
Kalos OC: 2 berries/charm Johto OC: 3 berries/charm

2.5 berries/charm, they both benefit by 0.5 berries/charm

Tomer: For every 1 line code: costs him 1/5 report——For every report, costs him 5 lines code

Charlotte: For every 1 line code: costs her 1/6 report——For every report, costs her 6 lines code

Comparative Advantages. Code: Charlotte Reports: Tomer