INTERNATIONAL TRADE AND AGREEMENTS

Absolute Advantage and

Comparative Advantage
Absolute Advantage
Absolute advantage is the ability of an
individual, company, region, or country to
produce a greater quantity of a good or
service with the same quantity of inputs per
unit of time, or to produce the same quantity
of a good or service per unit of time using a
lesser quantity of inputs, than another entity
that produces the same good or service.
Absolute Advantage

Japan Germany

3 cars or 4 cars or
9 motorcycles 8 motorcycles
Comparative Advantage
Comparative advantage is an economy's
ability to produce a particular good or
service at a lower opportunity cost than
its trading partners.
Oportunity cost
-the value of a choice is an alternative
forgone.

Terms of trade
-the rate of exchange at which both
trading entities could benefit.
Comparative Advantage

Japan Germany

3 cars or 4 cars or
9 motorcycles 8 motorcycles
Comparative Advantage
Japan 3 cars or 9 motorcycles
Opportunity 1 car = 3 motorcycles 1 motorcycles = 1/3 car
Cost

Germany 4 cars or 8 motorcycles

Opportunity 1 car = 2 motorcycles 1 motorcycles = 1/2 car
Cost

Terms of trade: 1 car = _ motorcycles

1 car = 2 < _ < 3 motorcycles
1 car = 2.5 motorcycles
Exercises:
US 20 planes or 2 Cruise Ships

FRANCE 12 planes or 2 Cruise Ships

-What is the opportunity cost of producing each product?

-Who has a comparative advantage in producing planes?
-Who has a comparative advantage in producing ships?
-What is the terms of trade that benefits each country?
 Exercises:
US 20 planes or 2 Cruise Ships
1 plane = 1/10 cruise ship 1 cruise ship = 10 planes
FRANCE 12 planes or 2 Cruise Ships
1 plane = 1/6 cruise ship 1 cruise ship = 6 planes

-What is the opportunity cost of producing each product?

-Who has a comparative advantage in producing planes? US
-Who has a comparative advantage in producing ships? FRANCE
-What is the terms of trade that benefits each country? 1 Cruise Ship = _ Planes
6 < _ < 10
Exercises:
KOREA 4 Laptops or 12 Phones

BRAZIL 1 laptop or 5 Phones

-What is the opportunity cost of producing each product?

-Who has a comparative advantage in producing laptops?
-Who has a comparative advantage in producing phones?
-What is the terms of trade that benefits each country?