GAINS FROM

TRADE
Macroeconomics
Trade Practice

■ Determine which country has an ABSOLUTE

ADVANTAGE in producing each product
■ Calculate the opportunity cost for producing one of
each product
■ Identify which country has a COMPARATIVE
ADVANTAGE in producing each product
■ Identify a TERMS OF TRADE that benefits both countries
Absolute Advantage

■ Who is better at producing something?

When you are better at producing something, meaning you produce
more of it or you need less resources to produce the same amount as
another country.

Either you can make more or you require less resources.

Which country has an
ABSOLUTE ADVANTAGE in
producing each
■ The US can produce 20 planes
product?
■ France can produce 12 planes

■ Korea can produce 3 cars or 9 motorcycles

■ Germany can produce 4 cars or 8 motorcycles

■ Japan can produce 4 laptops or 12 phones

■ Brazil can produce 1 laptop or 5 phones

■ Cuba takes 4 hours to make a TV and 12 hours to make salsa

■ Mexico takes 1 hour to make a TV and 5 hours to make salsa
Answer
1-3 Output 4-Input
■ US

■ Motorcycle - Korea
■ Cars - Germany

■ Laptop – Japan
■ Phones – Japan

■ Make TV – Mexico
■ Make Salsa - Mexico
■ The US can produce 20 planes
■ France can produce 12 planes

■ What is the opportunity cost of producing one of each product?

■ Who has a comparative advantage in planes?
■ What is a terms of trade that benefits both countries?
■ 1 cruise ship for _______ Planes

Can you answer this question?

No, because we don’t have enough information. We have to know what

else these countries can produce.
■ The US can produce 20 planes or 2 cruise ship
■ France can produce 12 planes or 2 cruise ship

■ What is the opportunity cost of producing one of each product?

■ Who has a comparative advantage in planes?
■ Who has a comparative advantage in cruise ship?
■ What is a terms of trade that benefits both countries?
■ 1 cruise ship for _______ Planes

Planes Cruise Ship

US 20 2
France 12 2
What is the opportunity cost of
producing one of each product?
Planes Cruise Ship

US 20 (1P costs 1/10C) 2 (1C costs 10P)

France 12 (1P costs 1/6C) 2 (1C costs 6P)

■ To get the per unit opportunity cost – COST / GAIN

US – 2 / 20 = 1/10
France – 2 / 12 = 1/6
Who has a comparative advantage in
planes? cruise ship?

Planes Cruise Ship

US 20 (1P costs 1/10C) 2 (1C costs 10P)

France 12 (1P costs 1/6C) 2 (1C costs 6P)

■ Cruise ship
France has a comparative advantage because they have a lover opportunity
cost when they decided to produce cruise ship compared to the US.
■ Planes
US has a lower opportunity cost in the production of planes.
Terms of Trade

■ Terms of trade is the idea a country should trade.

Planes Cruise Ship

US 20 (1P costs 1/10C) 2 (1C costs 10P)

France 12 (1P costs 1/6C) 2 (1C costs 6P)

1 cruise ship for _______ Planes

6 < ? < 10 Above 6 for France and below 10 for US

QUESTION no. 1
■ Korea can produce 3 cars or 9 motorcycles
■ Germany can 4 cars or 8 motorcycles

■ What is the opportunity cost of producing one of each product?

■ Who has a comparative advantage in cars?
■ Who has a comparative advantage in motorcycles?
■ What is a terms of trade that benefits both countries?
■ 1 car for _______ motorcycle

Cars Motorcycles
Korea 3 9
Germany 4 8
QUESTION no. 2
■ Japan can produce 4 laptops or 12 phones
■ Brazil can produce 1 laptops or 5 phones

■ What is the opportunity cost of producing one of each product?

■ Who has a comparative advantage in laptops?
■ Who has a comparative advantage in phones?
■ What is a terms of trade that benefits both countries?
■ 1 laptop for _______ phones

Cars Motorcycles
Japan 4 12
Brazil 1 5
QUESTION no. 3
■ Cuba takes 4 hours to make a TV and 12 hours to make salsa
■ Mexico takes 1 hour to make a TV and 5 hours to make salsa

■ What is the opportunity cost of producing one of each product?

■ Who has a comparative advantage in TVs?
■ Who has a comparative advantage in salsa?
■ What is a terms of trade that benefits both countries?
■ 1 salsa for _______ TVs

TVs Salsa
Cuba 4 12
Mexico 1 5