Comparative Advantage

1. Comparative Advantage • Why do countries choose to specialize and trade? • When might they choose not to? • How does comparative advantage apply to you?

2. Absolute Advantage - The ability to produce more of a given product using a given amount of resources. • Pretend there were only 2 countries in the world; Canada and the United States. Also, pretend they only made shoes and shirts (nothing else). Both spend about half their time making both products. • In the end, the U.S. makes more shoes than shirts and Canada makes more shirts than shoes. Their production efforts look like this:

3. Absolute Advantage - The ability to produce more of a given product using a given amount of resources. • Now, the sensible thing would be for each country to specialize where the U.S. makes only shoes and Canada makes only shirts. • If this occurred, their production table would look like this: • If each country traded 100 units of their good, they would benefit, as they would each have more goods than before. • The U.S. has absolute advantage in shoemaking and Canada has absolute advantage in shirt-making.

4. Comparative Advantage - The ability to produce a product most efficiently given all the other products that could be produced. • Now, suppose one country had an absolute advantage in both products. • In this case, the U.S. can make more of each good with the same resources as Canada. • Is it a good idea to trade under these circumstances? • The U.S. could produce 200 units of shoes or 160 units of shirts. Canada could make 160 units of shoes or 150 units of shirts.

5. If the U.S. produces only shoes, it gives up 80 units of shirts to gain 100 units of shoes. If Canada produces only shoes, it gives up 75 units of shirts to gain 80 units of shoes (see left chart). • The U.S. has a comparative advantage in shoemaking and Canada has a comparative advantage in shirt-making. If each country specializes in comparative advantage, their production schedule would look like the one above (in the middle). • By specializing, the two countries have increased production of shoes by 20 (180 to 200), but they have lost 5 units of shirts (155 to 150). • However, the U.S. could adjust for this by trading 10 units of shoes and gaining 8 units of shirts, which would, again, improve everyone’s situation. This would look like the chart on the right.

6. What does it all mean? • In the end, this two-product, two-country model is very simplistic. Real trade involves many products, resources, and countries. • Also, sometimes it’s not always clear where comparative advantages lie. • Still, it does provide a good example of how and why countries trade.

7. What time is it? Gametime, whoo! • Ok, so we’re gonna do a little simulation, to see what kind of sweet skills you may(or may not) possess. • There are four rounds. In each round you will be given a task that you will need to complete to the best of your ability in the time allotted. • After each activity, you will be scored. You will need to write your score down.

8. #1 - Service Skills • In this round, you will turn to a neighbor and will have 60 seconds to convince your neighbor to do the action shown in the picture to the right. • After, the neighbor will have to do the same to you. • Rate the speaker on a scale of 1-10, this is their score.

9. #2 - Sales Skills • In this round, you will turn to a different neighbor and have 60 seconds to create a sales pitch about why they should invest in Starbucks coffee. • After, the neighbor will have to do the same to you. • Rate the speaker on a scale of 1-10, this is their score.

10. #3 - Bureaucratic Skills • Part 1: The following is a National Park Service rule: • “No person shall prune, cut, carry away, pull up, dig, fell, bore, chop, saw, chip, pick, move, sever, climb, molest, take, break, deface, destroy, set fire to, burn, scorch, carve, paint, mark, or in any manner interfere with, tamper, mutilate, misuse, disturb, or damage any tree, shrub, plant, grass, flower, or any part thereof, nor shall any person permit any chemical, whether solid, fluid, or gaseous, to seep, drip, drain, or be emptied, sprayed, dusted on, injected upon, about or into any tree, shrub, plant, grass, flower.” • According to the rule, are these actions permissible? • a. mutilate a tree in your back yard • b. collect firewood in a national park • c. carve your initials on the bark of a small shrub in a national forest

11. #3 - Bureaucratic Skills (con’t) • Part 2: You have 2 minutes to alphabetize the following words: • synesthesia, synecdoche, synergist, synectics, synergy, synesis, synecious, synecology. • Part 1: (Answers - 2 pts. each) 1. Yes 2. Yes 3. No • Part 2: (Answers - 1/2 pt. each) synecdoche, synecious, synecology, synectics, synergist, synergy, synesis, synesthesia

12. #4 - Computer Skills • Answer these questions as best as you can. You will get 60 seconds per question: • 1. If a kangaroo at the bottom of a 30-foot well jumps up 3 feet each day and slides back down 2 feet, how long will it take her to reach the top? • 2. Convert 26 (base 10) to base 2. • 3. 100101 (base 2) minus 11101 (base 2) =? • 4. If Jonas is six inches taller than Juan and Jonas is three inches shorter than Jane, then the tallest person is _____, who is _____ inches taller than _____ and _____ inches taller than _____.

13. #4 - Computer Skills (con’t) • Answer these questions as best as you can. You will get 60 seconds per question: • 5. 4.6864 divided by 23.2 =? • 6. 28 is _____% of 400. • 7. If 4(x - 2) + 7y + 3 = 21 and y = 2, then x =? • 8. Find the average of the following numbers: 1, 3, 7, 10, 13, 17, and 19. • 9. Sue works 40 hours a week and earns $4 an hour. For every dollar she earns, she pays five cents in taxes. She can calculate her take-home pay in dollars by: Dividing 5 by ____, multiplying the answer by ____, subtracting the answer from ____, and then multiplying by ____.

14. #4 - Computer Skills (Answers) • Answer these questions as best as you can. You will get 60 seconds per question: • 1. If a kangaroo at the bottom of a 30-foot well jumps up 3 feet each day and slides back down 2 feet, how long will it take her to reach the top? (28 days) • 2. Convert 26 (base 10) to base 2. (11010) • 3. 100101 (base 2) minus 11101 (base 2) =? (1000) • 4. If Jonas is six inches taller than Juan and Jonas is three inches shorter than Jane, then the tallest person is Jane, who is 3 inches taller than Jonas and 9 inches taller than Juan.

15. #4 - Computer Skills Answers (con’t) • Answer these questions as best as you can. You will get 60 seconds per question: • 5. 4.6864 divided by 23.2 =? .202 • 6. 28 is _____% of 400. 7 • 7. If 4(x - 2) + 7y + 3 = 21 and y = 2, then x =? 3 • 8. Find the average of the following numbers: 1, 3, 7, 10, 13, 17, and 19. 10 • 9. Sue works 40 hours a week and earns $4 an hour. For every dollar she earns, she pays five cents in taxes. She can calculate her take-home pay in dollars by: Dividing 5 by 100, multiplying the answer by 4, subtracting the answer from 4, and then multiplying by 40.

16. Now, let’s see who should do what. • At your tables, discuss with your classmates who should assume the roles of Service Agent, Sales Person, Bureaucrat, and Techie. Use your scores from the four activities to decide. • This type of discussion between involved parties is known as specialization and this is precisely what guides trade between nations and individual.