GLOBAL

ECONOMY

UN

I T 3

Household Chores

(Output per hour)

Dishwashing

(Number of sink loads)

Sweeping

(Number of trash loads)

Betsy 2 3

Bert 1 1

• The Parents’ Plan: Do both jobs together, sharing the work. It will help them get along better.

• Betsy’s Plan: Divide the tasks and work separately. She does the dishes and Bert sweeps the garage.

• Bert’s Plan: Betsy should do all the work. She is a faster worker and he doesn’t want to get in her way.

• Friend’s Plan: Each person should work on what task they do best

• Friend’s Plan: Each person should work on what task they do best – SPECIALIZE!!

WHY

NATIO

NS TRADE

Absolute advantage – the ability to produce more units of a good or service than some other producer using the same quantity of resources

Comparative advantage- the ability to produce a good or service at a lower opportunity cost than another producer

• Natural resources, human capital, and physical capital are unevenly distributed from country to country. Because countries differ so much in resources, they also differ in their ability to produce different goods and services. They will specialize in certain products that they can produce most efficiently.

• For example, coffee is grown more efficiently in warm areas like Central America than in other parts of the world. Because countries cannot efficiently produce everything their citizens need and want, they engage in trade.

• A person or nation has absolute advantage when it can produce more of a given product using a given amount of resources.

• For example, suppose that two of your friends, Ricky Bobby and Dorothy Ann, want to make some extra money. They decide to print designs on T-shirts and make birdhouses.

T-Shirts per hour Birdhouses per hour

Dorothy Ann 6 2

Ricky Bobby 1 1

• As shown in the chart, Dorothy Ann can either print six T-shirts per hour or make two birdhouses per hour. Ricky Bobby can print one T-shirt or make one birdhouse per hour.

• In other words, Dorothy Ann is more productive

than Ricky Bobby in making both T-shirts and birdhouses.

• In economic terms, Dorothy Ann has an absolute advantage over Ricky Bobby in producing both goods.

• Suppose that each person is initially self-sufficient, they produce their own goods. Because Dorothy Ann enjoys absolute advantage in both goods, should she remain self-sufficient?

Would she be better off if she specialized in either T-shirts or birdhouses?

What should Ricky Bobby produce – T-shirts, birdhouse, or both?

•Countries have to face the same sorts of questions as individuals. Should a wealthy nation with many resources be self-sufficient, or should it specialize in a few products and trade for the goods it doesn’t produce?

• Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation. Opportunity cost – the most desirable

alternative given up as the result of a decision.

HTTPS://WWW.YOUTUBE.COM/WATCH?V=TMLSV9CSK0O

• The law of comparative advantage states that nations are better off when they produce goods and services they have a comparative advantage in supplying. The money nations make from selling those goods and services can be used to buy the goods and services they cannot produce as efficiently.

• http://www.youtube.com/watch?v=U12yZXBmQmY

• To determine comparative advantage in the example involving Ricky Bobby and Dorothy Ann, you need to look at the opportunity costs of producing T-shirts and birdhouses.oDA’s opportunity costs: In an hour, DA can make either six T-shirts or two birdhouses. She therefore sacrifices three T-shirts fro every birdhouse she produces. In other words, the opportunity cost of a birdhouse is the three T-shirts she could have produced instead. Conversely, the opportunity cost of a T-shirt is one-third of a birdhouse. oRBs opportunity costs: RB sacrifices only one T-shirt for every birdhouse. His opportunity cost for a birdhouse is the one T-shirt that he could have produced instead.

• Each person should produce the good for which he or she has a comparative advantage- that is, a lower opportunity cost than the other person. Opportunity Cost of a T-

shirtOpportunity Cost of a birdhouse

Dorothy Ann 1/3 birdhouse 3 T-shirts

Ricky Bobby 1 birdhouse 1 T-shirt

• Why is it sensible for Ricky Bobby to specialize in birdhouses?

DA has an absolute advantage in making birdhouses, but RB has a comparative advantage in birdhouses because he has a lower opportunity cost. DA has to give up three T-shirts in order to make one birdhouse. RB only has to give up one T-shirt.

Ricky Bobby Dorothy Ann

Specialization

Trade Gain from Specializat

ion

Specialization

Trade Gain from Specializat

ion

RB specializes, switching 2 hours from T-shirt production to birdhouse production.

RB trades 1 birdhouse for 2 T-shirts

Gain is the same number of T-shirts plus 1 more birdhouse

DA specializes, switching one half-hour from birdhouse production to T-shirt production.

DA trades 2 T-shirts for 1 birdhouse.

Gain is the same number of birdhouses and 1 more T-shirt.

Benefits from Specialization and Trade for Ricky Bobby and Dorothy Ann

http://www.youtube.com/watch?v=0hK9p8BSDMM

EXIT TICKET

• __________________ distribution of resources among nations leads countries to ________________ in products that require the use of their available resources. Countries may then ________________ with other countries for the products that they cannot produce.

• Comparative advantage : ________________________________ :

: absolute advantage : _____________________________________ .