No, it is comparative advantage

that
matters, not absolute advantage.
Nations should specialize and
trade based on absolute
advantage.

David Ricardo

“Euro” “Loonie” Adam Smith

Exports equal 32% of global economic output, but

only 13% of U.S. output. [U.S. supplies 1/8 of world’s exports]
In 2010, American imports & exports totaled over $4.1 trillion.
[$1.832 trillion in exports & $2,330 trillion in imports]
imports [Deficit $498 B]
B
• Joe Smith started the day early having set his alarm clock
(MADE IN JAPAN)
JAPAN for 6 a.m.
• While his coffeepot (MADE IN CHINA)
CHINA was perking, he
shaved with his electric razor (MADE IN HONG KONG).
KONG
• He put on a dress shirt (MADE IN SRI LANKA),
LANKA) designer jeans (MADE
IN SINGAPORE) and tennis shoes (MADE IN KOREA).
KOREA
• After cooking his breakfast in his new electric skillet
(MADE IN INDIA)
INDIA he sat down with his calculator (MADE
IN MEXICO) to see how much he could spend today.
• After setting his watch (MADE IN TAIWAN ) to the radio (MADE IN
INDIA) he got in his car (MADE IN GERMANY) filled it with GAS from
Saudi Arabia & continued his search for a good paying AMERICAN JOB.
• At the end of yet another discouraging and fruitless day
checking his computer (MADE IN MALAYASIA), Joe
decided to relax for a while.
• He put on his sandals (MADE IN BRAZIL) poured himself
a glass of wine (MADE IN FRANCE) and turned on his TV
(MADE IN INDONESIA), and then wondered why he can't
find a good paying job in America.....
Actually this is a good thing. We get more choices, lower
prices, & because more is bought, more jobs are created.
• Question: What is the definition of Globalization?
• Answer: Princess Diana’s death
• Question: How Come?
• Answer: An English princess with an Egyptian boyfriend
crashed in a French tunnel,
tunnel driving a German car with a
Dutch engine,
engine driven by a Belgian who was drunk on
Scottish whisky,
whisky followed closely by Italian Paparazzi,
Paparazzi
on Japanese motorcycles;
motorcycles treated by an American
doctor,
doctor using Brazilian medicines.
medicines
• This is sent to you by a Canadian,
Canadian using Bill Gates’
technology,
technology and you’re probably reading this on your
computer,
computer that uses Taiwanese chips,
chips and a Korean
monitor,
monitor assembled by Bangladeshi workers in a
Singapore plant,
plant transported by Indian lorry-drivers,
lorry-drivers
hijacked by Indonesians,
Indonesians unloaded by Sicilian
longshoremen,
longshoremen and trucked to you from Mexico.
Mexico
That is Globalization… The process by which
individuals and businesses in other parts of the world Lorry-drivers
are affected by events elsewhere in the world.
 Globalization: Merchandise Exports
as a Share of World GDP (32%)
32%
30%
Percent of GDP

25%
20%
15%
10%
5%
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2007 2008
Globalization increases U.S. income by $1.8 trillion a year,
year
or $10,000 per household. Or, without globalization,
Americans would be poorer by $1.8 trillion a year.
 14 million iPads were
$677
sold in the U.S. last
$700
year, but because
they were made in $600
China, were counted $498
$500
as imports.
imports $381

22 million pairs of $400

Nikes are imported

$300
each year, employing
50,000 Vietnamese. $200

American companies $100

have 54 million golf
balls produced in 0 95 97 99 01 02 03 04 07 08 09 10
China so they are imports.
imports
 Global Cow
“Who Supplied My Cheese?”
 Top 10 Countries with which the U.S. Trades
These Countries represent 66.89% of U.S. Imports, & 60.41% of U.S. Exports in
goods. The values are exports and imports added together
The values given are for Imports and Exports added together.
November 2011 Year To Date Total in
Total in Billions Billions
Country Name of U.S. $ of U.S. $
Canada 49.54 548.07
China 46.74 460.67
Mexico 40.86 423.08
Japan 18.30 177.66
Germany 13.15 134.60
United Kingdom 8.94 97.45
Korea, South 8.47 91.68
Brazil 6.68 67.49
France 5.88 62.13
Saudi Arabia 5.60 54.67
Trade is analogous to technology,
disruptive but ultimately beneficial.

$696 $498
$764
$381

2010 Trade Balance

-$498 billion

2006 2007 2008 2009 2010

Principal U.S. Exports & Imports – 2007
[in Billions of Dollars]
Source: Department of Commerce Data

Exports Imports
Chemicals $94.1 Petroleum $331.0
Consumer Durables 70.9 Automobiles 133.8
Agricultural Products 77.6 Household Appliances112.1
Semiconductors 50.2 Computers 104.0
Computers 42.9 Metals 115.7
Generating Equipment 41.5 Clothing 86.3
Automobiles 43.6 Consumer Electronics 94.7
Aircraft 48.6 Generating Equipment 55.0
Medical equipment 32.0 Semiconductors 37.1
Telecommunications 25.6 Telecommunications 25.8
Electrical machinery 83.2 Aircraft 34.4
Fuels and lubricants 47.7 Chemicals 56.2
 The U.S. and World Trade
U.S. Exports & Imports of Goods, 2007
Exports to:
to Value (Billions of Dollars)

Industrial Countries $553

Developing Countries 596
Total .
$1,149

Imports from:
from Value (Billions of Dollars)
Industrial Countries $819
Developing Countries 1,146
Total $1,965
Most of our imports come from developing countries.
 * You can make a good argument for these.
• *1. National Defense Argument:
Argument certain industries should
remain based in our country, especially if they manufacture
items vital to our defense.
defense Items this argument have been
used for include: pens,
pens pottery,
pottery peanuts,
peanuts papers,
papers candles,
candles
thumbtacks,
thumbtacks tuna fishing,
fishing and pencils.
pencils
• *2. Infant Industry Argument:
Argument new industries must be
protected from older, established foreign competitors until they
are mature enough to compete.
compete However, removing
protection is almost impossible.
• 3. Dumping Argument:
Argument domestic industries need to be
protected from foreign dumping. Dumping is the sale of goods
abroad at a price below their cost and therefore undersell
domestic competitors to put them out of business; obtain
monopoly power and raise their prices.
• 4. Foreign–Export–Subsidies Argument:
Argument Some
governments subsidize the firms that export goods.
goods Firms
say that this forces them to compete with both the firm and the
government in question.
• 5. Low Foreign Wages Argument:
Argument A country’s low
wage advantage may be offset by its productivity
disadvantage.
disadvantage High wages means high productivity.
Low wages mean low productivity.
 Some recent minimum wages in other countries:

Turkey: 41¢; India: 42¢, Hungary: $1.22, Brazil:

$1.50, Mexico: $6 a day, Haiti: 68¢ or $5.50 per day;
Indonesia: $1.06 a day [where Nikes are made].
 Even though these wages are very low, worker
productivity there is probably low. It may take several
workers to do what one American worker can do. The
more important question is what does it cost to do the job?
• Saving Domestic Jobs Argument:
Argument This argument is
actually most of the previous arguments but in disguise.
disguise
Country Share of Global Manufacturing - 2008
U.S.
China
U.S. Japan
ROW Germany
France

China Italy
UK
Korea
Russia
Japan Brazil
FR. Ger.
Rest World
U.S. manufacturing is not dying. It is at an all time high.
high We are
making more than twice as much today as we were in the 70s.
However we’ve gone from 19 million manufacturing jobs to 11
million because of increasing productivity or building the
same amount of stuff with fewer workers.
workers Where will they go?
High tech employs millions compared to almost none 50 years ago.
So, we are building twice as much with fewer workers.
workers That
trend will continue and then some. Health care. Clean energy. And
fields we can’t imagine yet. For instance, in 1900, 44% of jobs
were in agriculture.
agriculture Tremendous improvements in farm
productivity pushed that number to 2.2% today.
today Those who once
would have plowed fields now work at curing cancer,
cancer building
roads, etc. We don’t want those farm jobs back.
So, all of you who thought U.S. manufacturing was dead

“TAKE That!!!”
1. How many domestic jobs in the firms that produce
good X are being saved because of the tariff?
2. How much do consumers have to pay in higher
prices to save those jobs?

Let’s just see HOW MUCH

consumers do have to pay
when we protect domestic jobs
with tariffs and quotas.
12,000 x $40 = $480,000[NS-NT]; 12,000 X $25 = $300,000[S-T]
(It cost $180,000 to save one clock-radio guy’s job)
“I can do the
econ rap.”

Suppose Joe Export lives & works in the U.S. making dancing
clock radios. He produces and sells 12,000 clock radios per year
at a price of $40 each.
each There is no international trade.
One day the U.S. market is opened to dancing clock radios
from Japan. The Japanese manufacturers have a comparative
advantage and sell them for $25 each. Joe can not compete at
this price. His sales drop to such a degree that he goes out of
business. International trade has harmed him but helped
American consumers because they save $180,000.
Industry Yearly Loss Employment Annual Cost
To Economy Loss If Barriers Per Job
From Barriers Were Removed Saved
Textiles $15,850 billion 71,639 $221,258
Dairy Products 1,630 million 2,378 685,233

Sugar 657 million 2,040 322,059

Peanuts 74 million 397 187,223

Meat 177 million 928 190,733

Non-rubber 170 million 1,377 123,456
footwear

Orange Juice 307 million 609 635,103

Canned Tuna 100 million 390 257,640
I love the chicken
in this tuna can.

Chicken of the Sea

Chicken the Sea
of
of
High Cost of Protection
It cost an average of
$231,289 per job saved.

Consumers pay $100 billion

annually in higher prices.
Protecting sugar raises candy
and soft drink prices;
protecting steel makes car
prices higher.

This is a “negative-sum
game.”

So you can see that,

“Free trade is a
good idea for most
of us despite the
hardship it imposes
on a few of us.”
 Keep The Money At Home
Point: When I buy a coat in England, I have the coat
and England has the money. But when I buy a coat in
America, I have the coat and America has the money.
America is more wealthy because it has both the coat
and the money. Abe Lincoln

Counterpoint: Money is not wealth in and of itself,

it merely facilitates trade. If America sends dollars to
England, England will eventually use those dollars to
buy American goods. If we don’t buy goods from
other countries, then other countries will not be able
to buy goods from us.
 Point: Protecting businesses from
foreign competition preserves
American jobs.
Counterpoint: Few are helped by protective
policies, but they are more visible and more
vocal than the many who are hurt. Protecting
jobs in import competing industries raising
prices to consumers and costs jobs in
industries that use imported inputs. America
and consumers pay dearly each time
protectionist measures “save” jobs.
Protecting American businesses from foreign
competition does potentially preserve American jobs.
Point 1: Restrictions on imported steel in the 80s saved 17,000
jobs in the steel industry and its suppliers.
Counterpoint: That is half the story. Here is the rest of the story.
1. The higher steel prices saved 17,000 jobs in the steel
industry but led to the loss of 52,400 jobs in American steel-using
industries. For every job saved, three were lost.

Point2: Import quotas on Japanese autos preserved 4,598

American jobs.
jobs
Counterpoint2: but at a cost to consumers of $241,235
per job per year, in higher prices paid for cars. Saving a
$30,000 auto job cost consumers $120,000 annually in higher prices.

*The more you pay for protected goods, the less you have to use to
buy other goods. The less consumers.
have to buy other goods, then
fewer jobs will be created by the market.
In the last few years, tariffs have preserved 3,500 steel
jobs; by contrast tariffs have cost steel users
between 12,000 and 43,000 jobs due to higher prices.
 Point: If we trade freely with low wage countries,
U.S. businesses will flee to those countries and U.S.
wages will plummet.

Counterpoint: Low wages, combined with low

productivity, will result in high unit costs. High wages in
the U.S. Result from the high productivity of American
workers, aided by the availability of raw materials,
massive capital equipment, sophisticated management,
and elaborate infrastructure.
“I know you are against free
trade as a former employee.
But – how do you feel about
free trade as a consumer?
 18
16
Imports
14
12
10
8 Exports
6
4
2
0
1975 1980 1985 1990 1995 2000 2005

Total: $1,832 Exports Total: $2,330 Imports

Over $4 trillion going both ways
*Exports support 14 million American jobs. [Wages 16.5% higher]
6.5 million Americans work for foreign companies in the U.S.
Toyota alone has created more than 100,000 U.S. jobs.

2009 2010
Deficit in goods $501 Deficit in goods $646
Surplus in services $135 Surplus in services $149
$381 $488
U.S. Export of Services [X=$543 B; M=$394 B in 09[ [+149B]
500 million visit the U.S. every year bringing in $70 billion.
billion Foreign
visitors buy tourism “exports”, such as hotel rooms, airline fares
and consumer goods.
goods
Kentucky
Watching Americancolleges
movieswelcome 5,018 foreign
& TV programs students
[foreign sales
who for
accounted contribute
about half$85 million
of the to the state’s
film industry’s economy.revenue.
$5 B box-office
Hiring American investment bankers, bankers engineers,
engineers consulting fees,
royalty payments, accounts, architects, advertising agencies and even
lawyers38[they
U.S. earned
schools $20have 65 branches in 34 countries.
billion].
billion
UsingTheAmerican
U.S. hashospitals
more great or attending
collegesU.S.
thanschools.
the restAbout
schools of 3% of
all college
the students are foreigners. Tuition-paying foreign students pay
world combined.
about $18 billion a year on tuition, housing, & consumer goods. goods
About 700,000 foreign college students attend American colleges.
Texas attracted the 3rd largest # of foreign students with 38,000
who provide $615 million net spending to the Texas economy. economy
India leads with 104,000;
104,000 China is next with 98,000;
98,000 S. Korea has
75,000;
Texasand55%
75,000
In Texas, Canada has 30,000;
30,000 &master’s
of engineering Japan – 29,000;
degreesUSC-
29,000 go 7,500.
USC 7,500
to
CCCC has 630 foreign students. 1/3 of Richland’s are foreign;
foreigners.
foreigners
2,000
Over 50% of the PH.D.s in mathematics go to
at UTD out of 15,000. They make up 25% of grad students &
“nonresident
5% of undergrads.aliens”.
undergrads 1/3Also, 75%sci
of U.S. ofand
engineering PH.D.s&go
eng doctorates 40%to of
foreigners.
foreigners
PHD’s in comp sci go to foreigners. “Begging at the gates of world’s best”
 276 365

200 249

180
180 230
160
160
140
163
140 120
120
120 100

100
80 83
60
80 50
40 49 36
60 92 20 39
Canada Germany UK Korea France
China Mexico Japan Taiwan

40
0 61
Deficit
of 48 49
IMPORTS
20 $273 39
32 29 27 26
Germany UK
Canada China Mexico Japan Korea Netherlands Singapore France Taiwan
0
EXPORTS
http://www.census.gov/foreign-trade/statistics/highlights/top/index.html
Country Imports from Exports to
Australia Beef Airplanes
Aluminum Computers
Autos Auto parts

Belgium Jewelry Cigarettes

Cars Airplanes
Optical Diamonds

Canada Cars Auto parts

Trucks Cars
Paper Computers

China Toys Soybeans ($9 B)

Shoes Semiconductors 5 B
Clothes Chemicals ($4 B)

Germany Cars Airplanes

Engines Computers
Auto parts Cars

Japan Cars Airplanes

Computers Computers
Telephones Timber

Russia Oil Corn

Platinum Wheat
Artworks Oil Seed crops
[canola & sunflower]
South Korea Shoes Airplanes
Cars Leather
Computers Iron ‘ngots
Toyota Camry and Toyota Tundra
Honda Accord and Honda Odyssey Minivan Buy
BMW Z4 Roadster & BMWX5 SUV
American?
Mercedes-Benz-M-Class
Toyota Corolla
Subaru Legacy
Hyundai Elantra
Nissan Maxima
Chrysler Crossfire
Dodge Ram
Chrysler 300
Plymouth voyager
Chrysler PT Cruiser

Pontiac Firebird
Chevrolet Camaro and Impala
Ford Fusion
Mercury Capri
Chrysler 300
1957 Chrysler 300
Toyota Camry and Tundra – U.S.A. (California and Texas)
Honda Accord and Honda Odyssey Minivan – U.S.A. (Ohio)
BMWX4 Roadster and BMWX5 SUV – U.S.A. (South Carolina)
Mercedes-Benz-M-Class – U.S.A. (Alabama)
Toyota Corolla – U.S.A. (California)
Subaru Legacy – U.S.A. (Indiana) Foreign nameplates
Nissan Maxima– U.S.A. (Tennessee) were made in the U.S.
Hyundai Elantra– U.S.A. (Alabama)

Dodge Ram – Mexico Domestic nameplates were

Plymouth Voyager – Canada made in other countries.
Chrysler PT Cruiser – Mexico
Pontiac Firebird – Canada
Chevy Camaro and Impala – Canada
Ford Fusion - Mexico
Mercury Capri – Australia
Chrysler Crossfire - Germany
Chrysler 300 - Canada
This competition gives consumers higher quality,
more choices, and lower prices. Globalization has
blurred national auto identities.
Fiat owns Chrysler. Daimler builds Mercedes SUVs
in Vance, Alabama and owns stake in Mitsubishi and
10% of Hyundai Motor.
Motor
GM did own Saab and has stakes in Isuzu, Suzuki,
Subaru, Fiat and Daewoo.
Daewoo
Ford owns Mazda and Volvo.
By 2011, predictions are that foreign-based automakers will
build more cars at U.S. auto plants than the “Big 3”.
The BMW plant in S. Carolina sends 40% of its
Toyota
cars to other countries.
countries This is an example of Georgetown, KY

in-sourcing. As many as 20% of our exports Princeton, IN

Fremont, CA
are a result of in-sourcing. San Antonio, TX
[$800 mil. Plant
employing 2,000]
Honda
Toyota’s Tundra plant in San Antonio received Marysville, OH
East Liberty, OH
110,000 applications for the 2,000 positions Lincoln, AL
Hyundai
that pay from $15.50 to $25 an hour. Montgomery,AL
Nissan
Honda provides 50,000 high-output V-6 Smyrna, TN
engines for GM cars, blurring the distinction Canton, MS
Mitsubishi
between U.S./foreign cars. Asian and European Normal, IL
Hyundai
auto co’s employ 92,700 Americans directly Montgomery, AL
and 574,500 indirectly accounting for 33% of BMW
U.S. auto production.
production The “Big 3” employ Spartanburg, SC
Mercedes-Benz
240,000 workers.
workers It is less expensive to Vance, AL
Subaru
build an Accord here than ship it from Japan. Lafayette, IN
Only 16% of Honda cars sold here are imported Volkswagen
from Japan.
Japan Honda also buys $13 billion worth Chattanooga, SC
KIA
of parts from 620 suppliers in North America. West Point, GA
 [parts from 15 countries]

Ford Escort

Switzerland may get the inputs to make the

speedometer and gears from several countries.
1. Nestle Switzerland
2. Shell Netherlands
3. Lipton Great Britain
4. Baskin-Robbins Great Britain
5. Burger King Great Britain
6. Alka Seltzer Germany
7. Volvo Sweden
8. Sony Japan
9. Tropicana Canada
10. TV Guide Australia
11. Vaseline Great Britain
12. Bayer Germany
13. Gatorade U.S.
14. Adidas Germany
15. Levi Straus U.S.
Global Fruit Basket
Apples New Zealand
Apricots China
Bananas Ecuador
Blackberries Canada
Blueberries Chile
Coconuts Philippines
Grapefruit Bahamas
Grapes Peru
Kiwifruit Italy
Lemons Argentina
Limes El Salvador
Oranges Australia
Pears South Korea
Pineapples Costa Rica
Plums Guatemala
Raspberries Mexico
Strawberries Poland
Tangerines S.Africa
Watermelons Honduras
In an average can of mixed nuts,
nuts you find almonds
from Italy,
Italy walnuts from China,
China Brazilian nuts
from Bolivia,
Bolivia cashews from India,
India pistachios
from Turkey, and hazelnuts from Canada.
Canada
Trade fosters competition, which rewards productivity and restrains cost.

Video Equipment
TV sets
Toys
Photo equipment
Roasted coffee
Audio equipment
Dishes & flatware
Women’s outerwear
Men’s shirts/sweaters
Film & photo sup.
Girls’ apparel
Men’s footwear
New cars
Women’s dresses
More-traded Products Rice
Five-year price change (percent) HH laundry equip.
Less-traded Products
 Buy D-FW

BUY
Buy “D”
[If we consumed only the goods & services we produced,
we would toil long hours but remain dirt poor]
Japan – “Land of the $30 pizzas, $30 lipstick, $50
melons, $100 jeans and $4,500 two-bedroom apts.”
Japan has been a closed economy [fewer choices, higher
prices]
prices
The Japanese paid $28 billion
Item N.Y. Tokyo per year in higher prices for
Shock Absorbers $228 $605 rice because they would not
Alternator $120 $600 buy from U.S. rice farmers.
Watermelon $5 $50
Japanese consumers pay
Cup of coffee $1 $7
$600,000 in higher prices
Cab to airport $30 $200 for each job protected.
Stamp .44 .79
Gallon of gasoline $3.00 $7.00
Newspaper 1.50 $2.00
Movie Ticket $14 $20
We have 550 cars per 1,000;
1,000 Japan has only 240 per 1000 inhabitants.
Japanese cameras are more expensive in Tokyo than in New York. In Tokyo,
you have to have a sizable inheritance to be able to afford a house. Japan
has had a decade-long economic tailspin, even with interest rates less than 1%.
 [Selected Nations]
The 8 largest export nations account for 46% of world exports.
Percentage Share of World Exports, 2009
0 2 4 6 8 10 12
China
Germany
U.S.
Japan Principal U.S. exports include
Netherlands chemicals, agricultural products,
France consumer durables, aircraft, and
Italy semiconductors.
Belgium

So, China & Germany are the leading export nations but the
U.S. is the leading export and import [or trade]nation.
Source: World Trade Organization
The U.S. trade deficit with China in 2009 was $273 B. Wal-Mart
bought $20 B from China in 2010 & is their 8th largest trade partner.

Top Chinese Imports

(percentage of all imports)
88% of all Radios
87% Christmas & festive items
83% Toys
70% Leather goods
67% Shoes
67% Handbags
65% Lamps and lights We import 54 million golf
64% Cases for cameras, balls from China each year.
eyeglasses, etc.
60% Drills, power tools
56% Household plastics
54% Sporting goods
53% Ceramic Kitchenware
After a series of product recalls, from 10 million toys including “Big Bird”
pet food to tires, American regulators were recalled because of “lead”
are paying more attention to goods or magnets that tear the intestines
exported to the U.S. from China. when swallowed by children.

Who Buys Chinese Goods? 450,000 tires were

The U.S. accounts for 1/5 of all 1.5 mil imported toy recalled because of
Chinese export destinations, 2007. trains were made tire separation
using lead paint. problems.

$56
billion
In
goods
from
U.S.
to
China

More than 60 billion cans of cat FDA ordered recall after a poisonous 675,000 Barbie
and dog food were recalled. ingredient was found in toothpaste. doll accessories
The U.S. trade
deficit with
China in 2010
was $273 billion.
X to China $92 B
M from China $365 B
 The US buys far
more from
(IMPORTS) than it
sells (EXPORTS) to
China - the US
claims this is because
China has kept its
currency artificially
weak. In fact trade
with China accounts
for 14.3% of all US
trade - the States
only does more trade
with Canada.
Feb 2011
Apple’s I phone… $1.9 billion trade deficit
Export Goods & Services make
up about 12% of American GDP
Exports have more than
Doubled as a percent
of GDP since 1975 When I
was
born!
$498 billion trade
deficit in 2010
Write these into your notes!!!
Babe Ruth was the best hitter and pitcher on
his team. He had been the best pitcher in the
American League for several years, winning 94
Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11
games and losing only 46. 46 He could produce
at-bats, the Babe would have had over 200 more homeruns, somewhere around “950”.
the same amount of home runs as any teammate
with fewer at bats.
bats
The problem was that if he pitched, he would bat
fewer times because pitchers need rest after pitching.
The Babe had helped the Red Sox win the pennant in 1915, 1916, & 1918. 1918 He
had pitched 29 scoreless innings in the world series. As a pitcher for the Red
Sox in 1918 & 1919, he hit 40 of the Red Sox 46 home runs.
runs
After being sold to the Yankees in 1920,
1920 the coaches decided that the Babe
had a comparative advantage in hitting.
hitting A few pitchers on the team could pitch
almost as well as the Babe, but not one could touch the his hitting. In terms of
opportunity costs, the Yankees would lose fewer games if the Babe specialized
in hitting. So – the Babe ended up hitting 714 home runs even though he spent
seven years as a pitcher. And the Red Sox don’t win again – until 2004.2004
 Output v. Input Comparative and Absolute Advantage
Rabbit Wabbit Wabbit
Rabbit
1G=3B 1G=2B 1B=3G 1B=2G
1/3 G=1B Rabbit Wabbit 1/2 G=1B 1/3 B=1G Rabbit Wabbit 1/2 B=1G
Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G
Product Market [outputs] Resource Market [inputs]
Country Guns Butter Country Guns Butter
Rabbit 40 units 120 units Rabbit 40 hours 120 hours
Wabbit 20 units 40 units Wabbit 20 hours 40 hours
What country has an absolute What country has an absolute
advantage in guns? Rabbit advantage in guns?Wabbit

Why does Rabbit have an Why does Wabbit have an

absolute advantage in guns? absolute advantage in guns?

Rabbit can produce absolutely Wabbit can produce guns

more guns than Wabbit absolutely faster than Rabbit
[40 units v. 20 units] [20 hours v. 40 hours]
 I Can do 8 I have an absolute advantage
push-ups. in the production of push-ups.

I Can do 42
push-ups.

Ole Miss guy

MSU Bulldog

I’m more efficient. I can do the

I can clean that same work in 3 hours so I have
house in 4 hours. an absolute advantage.

Future Rebel/Blackbear Maid Future MSU Maid

service owner!
Two Isolated Nations
Constant Costs [Straight Line PPF’s]
Different Domestic Costs
Different Technology and
Resources in Each Nation
Self-Sufficiency Output Mix
Trading According to Comparative Advantage

With trade, a few people lose a lot,

a lot of people gain a little.
[Freer trade is like improved technology]
“We can produce 60 tons of
corn, so - we have an
absolute advantage because
we can produce more corn
with the same resources.”

60

“We can
produce 40
tons of corn.”

40
“We can produce 60 tons of corn, so - we have
an absolute advantage because we can
produce more corn with the same resources.
OR we could produce 50 tons of Wheat with
those same resources. We are Absolutely
better at corn, and COMPARED to you
we should do corn and you should do
wheat

60
“We can produce 40 tons of corn or we could
50 grow 50 tons of wheat with the same resources.”
Maybe we should do wheat? Because
COMPARED to you, we are better at wheat
and not as good at corn!

40
50
Country Comparative advantage due to natural resources &
climate
United States Wheat, corn, and cereals
Canada Timber
Saudi Arabia Oil
France Wine
Brazil Coffee
Israel Oranges and grapefruit
Mexico Tomatoes
Comparative Advantage and differences in opportunity
costs are the basis foradvantage
Comparative specialized production
largely and capital,
due to physical trade.
Country human capital, and scientific knowledge
United States Aircraft, computers, industrial chemicals, plastics, & chemicals
Japan Automobiles, steel, electronics
Germany Machine tools, scientific instruments, luxury automobiles
United Kingdom Financial services
Taiwan Textiles
Switzerland Watches
South Korea Ships
• Should Wisconsin grow oranges?
• Should Florida make cheese?
• No & No! [We don’t want the Florida cheese heads]
– Wisconsin should specialize in cheese
– Florida should specialize in orange production
– Then trade cheese for oranges Florida
– More cheese and oranges for everyone! Cheeseheads
• Disadvantages:
– Job losses among dairy farmers in Florida
– Job losses among orange growers in Wisconsin
• Advantages:
- Jobgains among dairy farmers in WI and job gains
among orange growers in FL more than make up for the
other job losses.
- Trade is beneficial for both states as a whole …
… though not for all residents.
80 PPC – before trade &
specialization– prisoners of
their own PPC’s and CPC’s
Before trade, I’m a prisoner of my own PPC.

F
PPC
I
S 40
CPC
[Consumption Possibilities Curve]
H

Tom Hanks alone

Tom’s Domestic Comparative Cost
1 shrimp = 4 fish
¼ shrimp = 1 fish
0 SHRIMP 20
10
90

Before trade, I’m a prisoner of my own PPC.

F
PPC
I
S 45
CPC
[Consumption Possibilities Curve]
H

Bubba Gump alone

Bubba’s Domestic Comparative Cost
1 shrimp = 6 fish
1/6 shrimp = 1 fish
0 SHRIMP 15
7.5
 Comparative and Absolute Advantage
[Comparative Advantage can produce at a lower productive opportunity
cost]
Toms’s DCC Bubba’s DCC
1S = __4 F 100
Tom Bubba 1S = __F
costs 6
costs 90
__
1/4 S = 1F 80 __ S
1/6= 1F
Terms of Trade
Fish

“A prisoner of “I can consume

Fish
50
my own PPC.” 45 only on my PPC.” 5 fish
1 Shrimp = __
40

World CC
1 Shrimp=__
5 Fish
oShrimp
10
20 0 7.5 9
Shrimp15 18
1__
/5 Shrimp=1 Fish

Separately they could have 90/15 or 80/20- together they can have 90/20!
Bubba and Tom are better together- they can SHARE!
“Do what you do best
& trade for the rest.”
Bubba should catch fish
and Tom should catch
Shrimp and share
Trade Allows Nations to Consume Beyond Their PPCs
While Producing On It
100 We are suspending reality.
CPC (after trade)
80 CPC (before trade)
PPC (before & after trade)
10 shrimp & 50 fish
50 11 shrimp and 45 fish
FISH

45 10 shrimp and 40 fish

40 12 shrimp & 40 fish
“Now with trade, you can escape
your PPC and CONSUME more of
both fish and shrimp.”

0 10 20
Shrimp
 Comparative and Absolute Advantage
[Comparative Advantage can produce at a lower productive opportunity
cost]
Haiti’s DCC Cuba’s DCC
= __
1B costs 4 C 100
Haiti Cuba 1B = __ C6
90 costs
__
1/4 B = 1C 80 __ B
1/6= 1C
Terms of Trade

Coffee
Coffee

“A prisoner of “I can consume

50
my own PPC.” 45 only on my PPC.” 5 coffees
1 bread = __
40

World CC
1 Bread=__
5 Coffees
o Bread
10
20 0 7.5 9
Bread 15 18
1__
/5 Bread=1 Coffee

“Trade is the free lunch of economics.”

1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] and import (bread/coffee).
[comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged
for (3/5/7) tons of coffee.
coffee Production in both is subject to (increasing/constant) opportunity costs.

“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.

Absolute Advantage - more efficient, can produce more with “Do what you do best
the same number of inputs [who can produce absolutely more] & trade for the rest.”
 30
Brazil’s DCC Brazil Chile Chile’s DCC
1W= costs__
4 S 20 1W= __
costs 2S
¼ = 1S
___W 12 ½
___W = 1S
15

Steel
Steel Terms of Trade
10
6 3 Steels
1 Wheat= ___

1.5 2 3 4
0 Wheat 0 5 10 World CC
Wheat
1 Wheat = __
3 Steels
__ Wheat = 1 Steel
1/3

4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage

in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel).
5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel.
The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat.
6. If the 2 countries trade, Chile would export (wheat/steel) & import (wheat/steel).
If the 2 countries traded, Brazil would export (wheat/steel) & import (wheat/steel).
 Examples of comparative advantage
Country Comparative advantage due to natural resources &
climate
United States Wheat, corn, and cereals
Canada Timber
Saudi Arabia Oil
France Wine
Brazil Coffee
Israel Oranges and grapefruit
Mexico Tomatoes

Comparative advantage largely due to physical capital,

Country human capital, and scientific knowledge
United States Aircraft, computers, industrial chemicals, plastics, & chemicals
Japan Automobiles, steel, electronics
Germany Machine tools, scientific instruments, luxury automobiles
United Kingdom Financial services
Taiwan Textiles
Switzerland Watches
South Korea Ships
 70 Brazil
DCC for U.S. 40 DCC for Brazil
1H= 14 B
costs __ 1H= costs__
10 B

Bread
___H
1/14 = 1B ___
1/10 H = 1B

Bread
Terms of Trade
0 Ham 5 0 Ham 4 1 Ham = __
12 Bread

8. Brazil has a comparative advantage in (bread/ham) and a

comparative disadvantage in (bread/ham).
9. The opportunity cost of producing 1 unit of ham for the U.S.
is (10/12/14) breads.
10. Acceptable terms of trade might be 1 ham for (8/12/16) breads.
 The countries of:
“Fuzzy” and “Wuzzy”
Fuzzy A B CC D E F DCC: Fuzzy Wuzzy A BB C D E F DCC: Wuzzy
900 600 300 0 1G
Plums 1500 1200 900 3 P Plums 3500
1G = __ 5P
2500 1500 1000 500 0 1G = __
35002500
Grapes 0 100 200 500__
200 300 400 500 1/3 G= 1P Grapes 150 300 450 575 700__
0 150 1P
1/5G = 1P

Terms of Trade
4 Plums
1 Grape = __

11. In Wuzzy,
Wuzzy the opportunity cost of 1 grape is (1/2/3/4/5) plums.
12. Fuzzy has a comparative advantage in & should produce (plums/grapes).
13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums.
14. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy
did not specialize it would produce combo “ B”. The gains from specialization
and trade are: (0/100/150) plums and (0/100/150) grapes.
Plums: They were making 900(c) and 2500(b) separately- so a total
of 3,400 plums working separately… but if we let Wuzzy focus
completely on plums… (while fuzzy is making grapes) there will be
3,500! So that is 100 extra… to share! (and 150 extra grapes)
 2.5 pork [10x1/4]
Froggy A B C D E DCC: Froggy Woggy A B C D E DCC: Woggy
Pork(tons) 4 3 2 1 0 1P = __ 5B Pork(tons) 8 6 4 2 0 1P = __ 3B
Beans(tons) 0 5 10 15 20 1/5__ P = 1B Beans(tons) 0 6 12 18 24 1/3
__ P = 1B
8 beans [2x4]
Terms of Trade
4 Beans
1 Pork = __
15. Production in both countries is subject to (increasing/constant)
opportunity cost.
cost
16. If these 2 nations specialize in accordance with comparative advantage,
advantage
Froggy will produce (pork/beans) & Woggy will produce (pork/beans).
17. In Froggy,
Froggy the opportunity cost of 1 pork is (1/5 or 5 or 3) beans’
18. Assume that prior to specialization & trade, Froggy produced combo “C” and
Woggy produced “B”.“B” If these 2 nations now specialize according to comparative
advantage,
advantage the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork.
19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans.
beans
 50 Fish [10x5]
Piggy A B C D E DCC: Piggy Wiggy A B C D E DCC: Wiggy
Fish 4 F
80 60 40 20 0 1C = __ Fish 240 180 120 60 0 1C = __F 6
Chips 1/4 C = 1F
0 5 10 15 20 __ Chips
Chip 0 10 20 30 40 __ 1/6C = 1F
12 chips [60x1/5]
Terms of Trade

5 Fish
1 Chip = __
20. (Piggy/Wiggy) has an absolute advantage in both fish & chips. chips
21. For Wiggy,
Wiggy the opportunity cost of producing 1 ton of chips
is (1/4/6) tons of fish.
22. Wiggy should specialize(export)
specialize in (fish/chips) and import (fish/chips).
23. Before specialization and trade Piggy chose combo “C” and Wiggy chose “B”. “B”
After specialization, the gains from trade were (20/40/60) tons of fish and
(0/10/20) tons of chips.
chips

Fish: They were making 40(c) and 180(b) separately- so

a total of 220 fish working separately… but if we let wiggy
focus completely on fish… there will be 240! So that is 20
extra… to share! (piggy still makes an efficient 20 chips)
 15 soups [30x1/2]
Doggy A B C D E DCC: Doggy Woggy A B C D E DCC: Woggy
Soup 60 45 30 15 0 1S = __ 1P Soup 20 15 10 5 0 1S = __ 3P
Peanuts 0 15 30 45 60 Peanuts 1/3S = 1P
0 15 30 45 60 __
60 Peanuts [30x2]
Terms of Trade
2 Peanuts
1 Soup = __

24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts).
Woggy will export (soup/peanuts) and import (soup/peanuts).
25. For Doggy,
Doggy the opportunity cost of 1 soup is (1/2/3) peanuts.
For Woggy,
Woggy the opportunity cost of 1 soup is (1/2/3) peanuts.
26. Prior to specialization, Doggy & Woggy chose combination “C”.
Now each specializes according to comparative advantage.
advantage The gains
from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts.
peanuts
 Djibouti DCC: Djibouti Canada DCC: Canada
Fish 10 hours 1W costs 2 Fish 20 hours
= __F 1 W costs
= __ 3F
Wheat 20 hours ___
1/2 W=1F Wheat 60 hours 1/3 = 1F
___W

Terms of Trade:
1 Wheat = 2
__
.5 Fish
27. (Djibouti/Canada) has an absolute advantage in both commodities.
(Djibouti/Canada) has a comparative advantage in producing wheat.
28. (Djibouti/Canada) has an absolute disadvantage in both,
both but a
comparative advantage in fish.
fish
29. Advantageous trade can occur between the two when
1 wheat is exchanged for (1/2.5/3) fish.

We are going to turn inputs into outputs.

In 20 hours,
hours Djibouti can produce an output of 1 wheat or 2 fish.
fish
In 60 hours,
hours Canada can produce an output of 1 wheat or 3 fish.
fish
 [lower # of hours gives absolute advantage]

DCC: U.S. Russia DCC: Russia

Caviar 6 hours 2
1C = __W Caviar 16 hours 1C = __4W
Wheat 3 hours 1/2
__ C = 1W Wheat 4 hours 1/4
__ C = 1W

Terms of Trade
3 Wheats
1 Caviar = __

30. (Russia/U.S.) has an absolute disadvantage in both commodities.

commodities
(Russia/U.S.) has a comparative advantage in wheat.
wheat
31. (Russia/U.S) has an absolute advantage in both commodities.
commodities
(Russia/U.S.) has a comparative advantage in caviar.
caviar
31. Advantageous trade can occur between the two nations when
1 caviar is exchanged for (1/3/5) tons of wheat.
wheat

We are once again turning inputs into outputs.

In 6 hours,
hours the U.S.A. can produce an output of 1 caviar or 2 wheats.
In 16 hours,
hours Russia can produce an output of 1 caviar or 4 wheats.
wheats
 Absolute Advantage [Outputs v. Inputs]
Inputs
Remember that with outputs or quantity,
quantity the larger
number indicates absolute advantage;
advantage that country
can produce absolutely more with the same inputs,
and is more efficient.

Product
Market
And with inputs (hours),
hours the smaller number indicates absolute
advantage;
advantage that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.

Resource
Market
 2nd Most Missed Question On 95 AP Exam [26% correct]
Country Food Clothing
Ducky 20 hours 50 hours
Ducky Wucky 10 hours 20 hours Wucky
a. Ducky has a comparative advantage in the production
of both food and clothing.
b. Wucky has a comparative advantage in the production
of both food and clothing.
c. Ducky has a comparative advantage in food production, &
Wucky has a comparative advantage in clothing production.
d. Ducky has a comparative advantage in clothing production,
& Wucky has a comparative advantage in food production.
e. Neither country has a comparative advantage in the
production of either good.
Country Food Clothing
Ducky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F
Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F

Terms of Trade might be 1C = 2.2F

 Output v. Input Comparative and Absolute Advantage
Rabbit Wabbit Wabbit
Rabbit
1G=3B 1G=2B 1B=3G 1B=2G
1/3 G=1B Rabbit Wabbit 1/2 G=1B 1/3 B=1G Rabbit Wabbit 1/2 B=1G
Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G
Product Market [outputs] Resource Market [inputs]
Country Guns Butter Country Guns Butter
Rabbit 40 units 120 units Rabbit 40 hours 120 hours
Wabbit 20 units 40 units Wabbit 20 hours 40 hours
What country has an absolute What country has an absolute
advantage in guns? Rabbit advantage in guns?Wabbit
Why does Rabbit have an Why does Wabbit have an
absolute advantage in guns? absolute advantage in guns?
Rabbit can produce absolutely Wabbit can produce guns
more guns than Wabbit absolutely faster than Rabbit
[40 units v. 20 units] [20 hours v. 40 hours]
What country has a comparative
What country has a comparative
advantage in guns? Rabbit
advantage in guns? Wabbit “Let’s change inputs into outputs.”
Wabbit can produce guns at a lower Rabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters] opportunity cost [1/3 butter v. 1/2 butter]