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7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
1/15
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Comparative Advantage
and Trade
2-1
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
2/15
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-2
Economic Growth In the
Past Two Thousand Years$6,000
$5,000
$4,000
$3,000
$2,000$1,000
2010150010005000
P
ercapitainco
me
(in1990dolla
rs)
WHY?
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
3/15
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The Economics of Babe Ruth
2-3
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
4/15
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Babe Ruth Statistics
Boston Red Sox Pitcher
1915 18-8 2.44
1916 23-12 1.75*
1917 24-13 2.011918 13-7 2.22 *Means
New York Yankee Right Fielder led the
1918 11* .300 league1920 54* .376
1923 41* .393*
1927 60* .356
2-4
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
5/15
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Comparative Advantage
Comparative Advantagethe relativelymost productive use of a resource
Hitting was the Babes comparativeadvantage
Very good pitcherplayed every 4-5 days
Great hitterplayed every day and changedthe game forever
Specializedpitched a total of only 5games after 1919
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7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
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McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-6
Production Possibilities
Without TradeProduction Possibilities Curves
for Pakistan and Belgium
What does each country dobest? Hint: Think opportunitycosts.
1 2 3 4
4
3
2
1
5
Chocolate (in tons)
Textiles
(inthousandsof
yards)
Belgium
Pakistan
A
B
E
D
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
7/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-7
Specialization and Trade
How could they get to point C where eachcountry can consume 2,000 tons of fabricand 2 tons of chocolate?
1 2 3 4
4
3
2
1
5
Chocolate (in tons)
Textiles
(inthousandsof
yards)
Belgium
Pakistan
A
B
C
E
D
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
8/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-8
Specialization and
Comparative AdvantageFor Pakistan the opportunity cost of one ton of chocolateis 4000 yards of textiles.
For Belgium the opportunity cost of one ton of chocolateis 250 yards of textiles.
Belgium has the comparative advantage in chocolateand specializes producing 4 tons (point E). Pakistanhas the comparative advantage in textiles andspecializes producing 4000 yards (point D).
1 2 3 4
4
3
2
1
5
Chocolate (in tons)
Textiles
(inthousandsof
yards)
Belgium
Pakistan
A
B
C
E
D
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
9/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-9
Comparative Advantage and
the Combined PPC
1 2 3 4 5
4
3
2
1
5
Chocolate (in tons)
Textiles
(inthousandsofyard
s)
Belgium
Pakistan
H(4,4)
F (0,5)
G (5,0)
Note how much more they canhave if they specialize and trade
The combined PPC is the curveconnecting points F, H, and G.
. C (2,2)
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
10/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-10
U.S. Textile
Production and Trade
Two hundred years ago, the U.S. had acomparative advantage in textileproduction.
Now countries with cheaper labor, suchas Bangladesh, have the comparative
advantage in textiles. The gains from trade are higher wages for
workers in Bangladesh and lower-pricedcloth for U.S. consumers.
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
11/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-11
Comparative Advantage Review
Suppose that the U.S. can produce 100 computer chips
or 100 video games in one hour. Japan can produce 40computer chips or 80 video games in one hour.
What is the opportunity cost of computer chips in each
country?
In which product should each countryspecialize?
The U.S. is more efficient in producing both computerchips and video games. Can the U.S. benefit by tradingwith Japan?
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
12/15McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
2-12
In the U.S. the opportunity cost of 1 video game is 80/80= 1 computer chip.
In Japan the opportunity cost of 1 computer chip is 80/40= 2 video games.
U.S. should specialize in computer chips.
Produces 100 per hourJapan should specialize in video games.
Produces 80 per hour
They agree to trade 1 computer chip for 1.5 video gamesU.S. gets video games for 2/3 of a computer chipJapan gets computer chips for 1.5 video games
Both countries have reduced their opportunity costs
7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
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2-13
Comparative Advantage and
Outsourcing Outsourcing : The relocation of production once
done in the U.S. to foreign countries.
Outsourcing occurs because of comparativeadvantage
What is the comparative advantage of countries such as India
and China? What is the comparative advantage of the U.S.?
What economic activities are being outsourced?
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7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
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2-14
Globalization Globalization: The increasing
integration of economies, cultures,and institutions across the world.
The positive effect of globalization isthat it provides larger markets than thedomestic economy.
The negative effect is that it results inincreased competition.
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7/30/2019 2.2--Comparative Advantage, Trade, And Globalization
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2-15
Law of One Price
Wages of similar workers in one countrywill not differ significantly from the wagesof workers in another institutionallysimilar country.
If the U.S. loses its comparative advantage
based on technology and institutionalstructure, U.S. wages will decreaserelative to wages in many other countries.