Lecture on Comparative Advantage

Introduction

• Speaker: Jacob Reed from ReviewEcon.com
• Topic: Comparative Advantage
• Purpose: Understanding specialization and trade to improve welfare
• Additional Resources: Total Review Booklet at ReviewEcon.com

Absolute Advantage

• Definition: Ability to produce more with fixed resources or the same amount with fewer resources
• Example: Two countries - Big Country and Little Country
  • Big Country: Can produce 80 tons of grain or 40 tons of meat
  • Little Country: Can produce 20 tons of grain or 20 tons of meat
• Finding Absolute Advantage:
  • Grain: Big Country (80 tons vs. 20 tons)
  • Meat: Big Country (40 tons vs. 20 tons)

Comparative Advantage

• Definition: Ability to produce something at a lower opportunity cost
• Opportunity Cost: What you give up when you make a choice
• Calculation for Output Problems: Other over formula
  • Big Country (Grain): 40 (meat) / 80 (grain) = 0.5 tons of meat
  • Big Country (Meat): 80 (grain) / 40 (meat) = 2 tons of grain
  • Little Country (Grain): 20 (meat) / 20 (grain) = 1 ton of meat
  • Little Country (Meat): 20 (grain) / 20 (meat) = 1 ton of grain
• Comparative Advantage Analysis:
  • Grain: Big Country (0.5 tons of meat vs. 1 ton of meat)
  • Meat: Little Country (1 ton of grain vs. 2 tons of grain)

Specialization and Trade

• Big Country: Produces 80 tons of grain
• Little Country: Produces 20 tons of meat
• Terms of Trade: Must be mutually beneficial (between opportunity costs)
  • Example: 1 ton of grain between 0.5-1 ton of meat
  • Example: 1 ton of meat between 1-2 tons of grain
• Impact of Non-Mutual Trade:
  • If outside the beneficial range, one country benefits and the other is worse off
  • Example: 1 ton of grain for 3 tons of meat benefits Big Country, hurts Little Country
• Mutually Beneficial Trade:
  • Example: 1 ton of meat for 1.5 tons of grain
  • Outcome:
    • Big Country: Gains 10 tons of meat, loses 15 tons of grain
    • Little Country: Gains 15 tons of grain, loses 10 tons of meat
• Benefit: Specialization and trade allow consumption outside the production possibilities curve

Input Problems

• Input Definition: Time or labor units needed to produce goods
• Example: Ashley and Omar
  • Mopping: Ashley (6 min), Omar (12 min)
  • Vacuuming: Ashley (3 min), Omar (4 min)
• Absolute Advantage: Fewer resources needed
  • Vacuuming: Ashley (3 min < 4 min)
  • Mopping: Ashley (6 min < 12 min)
• Comparative Advantage in Input Problems: It over formula
  • Ashley (Mopping): 6 / 3 = 2 vacuumings
  • Ashley (Vacuuming): 3 / 6 = 0.5 mopping
  • Omar (Mopping): 12 / 4 = 3 vacuumings
  • Omar (Vacuuming): 4 / 12 = 0.33 mopping
• Comparative Advantage Analysis:
  • Mopping: Ashley (2 vacuumings < 3 vacuumings)
  • Vacuuming: Omar (0.33 mopping < 0.5 mopping)
• Specialization and Trade: Based on comparative advantage
  • Mutually beneficial trade terms:
    • Mopping: 2 to 3 vacuumings
    • Vacuuming: 0.33 to 0.5 mopping

Conclusion

• Call to Action: Practice at ReviewEcon.com, use the comparative advantage game
• Additional Help: Total Review Booklet for AP exams in microeconomics or macroeconomics