OTL 1.

Name__________________________________

Comparative Advantage
Learning Target 1: I can determine which country has an absolute advantage in the production of a good, using outputs and inputs
Absolute Advantage Outputs: when comparing two countries production possibilities, whichever country can make more of a particular good has an absolute advantage in that good Inputs: whichever country uses fewer inputs (cost, time) to make 1 of a good, that country has the absolute advantage Production Possibilities Fish 20 10

Fish China 20 or Japan 10

Cars 40 50

For outputs, Who has the absolute advantage in cars?

40

50

Cars

For inputs, who has the absolute advantage in cars?

Learning Target 2: I can determine which country has a comparative advantage in a product, for inputs and outputs, and explain what this means and its signicance for trade and production Comparative Advantage: The Basis for Trade 1. Calculate the opportunity cost to each country of producing one of each good 2. The country with the lowest opportunity cost in a good compared to the other country as a comparative advantage in that good 3. Whoever has a comparative advantage in a good should specialize in and make that good, and then trade for the other good
Calculating Opportunity Cost Outputs: Opp. Cost for 1 Good X = Good Y/Good X Inputs: Opp. Cost for 1 Good X = Good X/Good Y

Assess Yourself
The United States production possibilities are as follows: they can make 150 clothes or 100 software. Malaysia, on the other hand, can make 60 clothes or 20 software (fyi use the number 20, even though the video says 10 here). Show (calculating the opportunity cost) and explain which country has the comparative advantage in clothes, and in software.

Fish China 20 Japan 10

Cars 40 50

For outputs, which country has the comparative advantage in sh? Why?

For outputs, which country has the comparative advantage in cars? Why?

For inputs, which country has the comparative advantage in sh? Why?

Learning Target 3: I can determine the mutually benecial terms of trade between countries
Mutually Benecial Terms of Trade If the countries decide to specialize and trade, what should the terms of trade be to where both countries benet? use United States and Malaysia example from above Mutually benecial terms (range) of trade The production possibilities for China and Japan are below. Suppose China and Japan decide to specialize in the good they have the comparative advantage in and then trade. Which of the following would be a mutually benecial term of

Finding the terms of trade (range) For 1 of Good X = a number in between the two opportunity costs of Good X in terms of Good Y

For 1 Clothes: For 1 Software:

a. 1 sh: 3 cars b. 1 car: 4 sh c. 1 car: 1/5 sh d. 1 sh: 1/3 cars e. 1 car: 1 sh

Learning Target 4: I can determine the consumption possibilities for a country given a term of trade
Consumption Possibilities - possible combination of goods a nation can consume - can consume more with specialization and trade than with self sufciency PPF and CPF for Malaysia Draw a PPF and consumption possibilities frontier for Japan assuming a mutually benecial term of trade is 1 car for 1/4 sh or 1 sh for 4 cars.

Clothes US 150 Malaysia 60

Software 100 20

Term of Trade 1 clothes for 1/2 software

What are Malaysias consumption possibilities with specialization and trade?

Malaysia had CA in clothes and US in software

Fish China 20 Japan 10

Cars 40 50