Chapter 34

3.1 A2 HL Comparative Advantage and Trade

1What determines greater efficiency or lower costs? Costs of production varies between countries because of factor endowments types of factors of production a country is gifted with.Task: Think of a countrys 2 or 3 major exportsResearch the relevant factor endowments

Imagine . . .only two goods: potatoes and meatonly two people: Mr. Jones and a Mrs. ChoiShould they each produce for their own needs or should they trade?A Parable for comparative advantage

3Who is most efficient at each product?Would you think theres a good reason to trade?

The producer that requires a smaller quantity of inputs (in this case, hours of labour) to produce a good is said to have an absolute advantage in producing that good. Does that mean Mrs. Choi has no reason to trade?

Consider Mr. Jones Production and consumption Possibilities FrontierPotatoes (pounds)Meat (pounds)

42120A

57Mrs. Chois Production and consumption Possibilities FrontierPotatoes (pounds)Meat (pounds)

5422.50B

67Compare the Opportunity Cost for each person producing Meat and PotatoesWho has the comparative advantage for a) meat b) potatoes?The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

1 lb. of Meat1lb. Of PotatoesMr. Jones2 lb. potatoes0.5 lb. meatMrs. Choi1.25 lb. potatoes0.8 lb. meat

The Gains from Trade: Suppose the terms of trade is 0.66 Lbs. of meat for 1 Lbs. of Potatoes:using the data below, calculate how much each person has gained.Can you show the new consumption frontier after trade (on each PPF) has increased? Thats why its good to trade even for Mrs. Choi!

Limitations of the theoryTo what extent are these assumptions valid? there is perfect knowledge of cheapest productsNo cost is involved for transportationOnly 2 countries that tradecosts do not change, there are no EoSThe goods traded are identical FoP remain in the countryTrade is perfectly free

9Sheet1Output(Q per day)Total Cost (TC)Marginal CostEquilibrium PEquilibrium Q(1) Price per ton (market price)$160?FallRise(2) Quantity (per day)6 tons$100RiseFall(3) Total Revenue$960$160RiseRise(4) Total variable cost$460$250FallFall(5) Total fixed cost$200(6) Total cost$660(7) Total economic profit$300(8) Profit per unit$50Hours Needed to Make 1 lb. of:Amount Produced in 40 HoursMeat PotatoesMeat PotatoesJones20 hours/lb 10 hours/lb2 lbs. 4 lbs.Choi10 hours/lb 8 hours/lb.4 lbs. 5 lbs.

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Sheet1Output(Q per day)Total Cost (TC)Marginal CostEquilibrium PEquilibrium Q(1) Price per ton (market price)$160?FallRise(2) Quantity (per day)6 tons$100RiseFall(3) Total Revenue$960$160RiseRise(4) Total variable cost$460$250FallFall(5) Total fixed cost$200(6) Total cost$660(7) Total economic profit$300(8) Profit per unit$50Hours Needed to Make 1 lb. Of:Amount Produced in 40 HoursMeat PotatoesMeat PotatoesFarmer20 hours/lb 10 hours/lb2 lbs. 4 lbs.Rancher1 hours/lb 8 hours/lb.40 lbs. 5 lbs.The OutcomeWith Trade:The Outcome With Trade:What They Produceand ConsumeWhat TheyProduceWhat TheyTradeWhat TheyConsumeFarmer1 lb meat (A)2 lbs potatoesJones0 lbs meat 4 lbs potatoesGets 1.3 lbs meatfor 2 lb potatoes1.3 lbs meat (A*)2 lbs potatoesRancher20 lbs meat (B)2.5 lbs potatoesChoi4 lbs meat 0 lbs potatoesGives 1.3 lbs meatfor 2 lb potatoes2.7 lbs meat (B*)2 lbs potatoes

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