Comparative Advantage

• Opportunity Cost:

  • Definition: The value of the next best alternative that must be foregone to undertake an activity.

• Production Possibility Frontier (PPF):

  • Illustrates combinations of two goods that can be produced with current technology.
  • Example: For Toni on an island, she can collect either:
  • 10 coconuts in a day
  • 5 fish in a day.

Opportunity Cost Calculation

• Example: If Lisa's PPF shows production of fish and coconuts, the opportunity cost of producing 1 pound of fish needs to be computed based on her production capabilities.

Principle of Increasing Opportunity Cost

• Concept:

  • As production of one good increases, the opportunity cost of producing it also increases.
  • This principle is illustrated by the PPC being bowed outward.

• Application:

  • When expanding production, resources with the lowest opportunity cost should be utilized first before turning to those with higher costs.
  • This is often described as the "low-hanging fruit principle."

PPC and Agricultural versus Capital Goods

• Scenario:

  • If society’s PPC follows this principle and bundles (Agricultural, Capital) = (100,0) and (50,40) exist on the PPC, the maximum output of capital goods can only be surmised as not exceeding 80.

• Decreasing Opportunity Costs:

  • If production had decreasing opportunity costs, the PPC shape would differ; it would bow inward.

Factors Affecting the PPC

• Economic Growth:

  • Caused by increase in productive resources or improvements in technology, leading to outward shifts in the PPC.

• Illustration of Scarcity:

  • The downward slope of the PPC shows that gaining more of one good entails losing some of another good.

Comparative Advantage Definitions

• Comparative Advantage (CA):

  • A person has a CA in producing a good if their opportunity cost for that good is lower than for others.

• Absolute Advantage:

  • A person has this if they can produce more of something than anyone else using the same resources.

Application of Comparative Advantage

• Example: Between Gilligan and Mary Ann, identifying their comparative advantages involves assessing their separate production capabilities in coconuts and fish.

Gains from Trade

• Trade Principle:
  • Everyone achieves better outcomes when they specialize in the activities for which their opportunity costs are lowest.

Comparative Advantage and International Trade

• Context:

  • Nations, like individuals, can benefit from specialization and trade based on comparative advantage.

• Concerns about Free Trade:

  • While free trade can increase total value of goods, it may not benefit everyone equally; some may suffer economic consequences.

Example in Practice: iPhone Production

• Apple's Production:
  • Primarily assembled in China to lower costs, affecting U.S. manufacturing jobs negatively.
  • Outcomes for different groups:
  • Workers in U.S. manufacturing = Losers
  • Owners of iPhones, designers based in California = Winners.

The "China Shock"

• Economic Analysis:
  • The emergence of China affected global trade dynamics, leading to analysis of its impacts on the U.S. economy, including job market responses and wage effects post-1990s.