mr. gerdes’ ap macroeconomics comparative advantage
TRANSCRIPT
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Mr. Gerdes’AP Macroeconomics
Comparative Advantage
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Ricky Ricardo
• Lucy’s Cuban-American husband drumming on the bongo.
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David Ricardo
• English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.
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Absolute Advantage v. Comparative Advantage
• Absolute Advantage
– Faster, more, more efficient
• Comparative Advantage
– Lower opportunity cost
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Specialization
• Producing according to comparative advantage
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Example
• Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what.
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ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr. 8 pizzas/hr.
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ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr. 8 pizzas/hr.
Who has the absolute advantage in baking cakes?Who has the absolute advantage in making pizza?
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ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr. 8 pizzas/hr.
Why?Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.
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ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr. 8 pizzas/hr.
Who has the comparative advantage in baking cakes?Who has the comparative advantage in making pizza?
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Example
Who has the comparative advantage in baking cakes?Who has the comparative advantage in making pizza?
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Example
Why?Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake.
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Example
Furthermore, it only cost David 1/3 of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.