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2.01 Understand the concept of comparative advantage and global factors of production

2.01 Understand the concept of comparative advantage and global factors of production. A Rice Culture. Rice grown in Japan Grown on small farms Japanese consumers pay up to 7x more than US consumers Multiple uses of rice (clothing, mats, & household items) Japanese government subsidies

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2.01 Understand the concept of comparative advantage and global factors of production

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  1. 2.01 Understand the concept of comparative advantage and global factors of production

  2. A Rice Culture • Rice grown in Japan • Grown on small farms • Japanese consumers pay up to 7x more than US consumers • Multiple uses of rice (clothing, mats, & household items) • Japanese government subsidies • Powerful farmers’ lobby • 700% tariff on imported rice

  3. Economic theories • Absolute advantage - a country can produce more units of a product at a lower cost using fewer resources than other countries • Ex) US - absolute advantage over Japan in rice & cotton production, can produce at lower price per unit than Japan • Ex) US - absolute advantage over France in cheese production; can produce at lower price per unit than France • Ex) Canada - absolute advantage with lumber production; can produce at lower price than other countries • Ex) China - absolute advantage over the US in toy production; can produce at lower price than US

  4. Economic theories (con’t) • Comparative advantage - a country should specialize in the production of a product that it can produce relatively better, or more efficiently than other countries • More efficiently includes being able to produce product with lower opportunity cost • Ex) Japan – comparative advantage over US producing rice, can produce more efficiently with lower opportunity cost than US • Ex) US - comparative advantage over Japan producing cotton, can produce more efficiently with lower opportunity cost than Japan • Ex) Brazil - comparative advantage over US producing coffee; can produce more efficiently with lower opportunity cost than US • http://www.youtube.com/watch?v=Pd_qs8ueIWw • http://www.youtube.com/watch?v=Vvfzaq72wd0 • Two you-tube videos on absolute & comparative advantages

  5. Economic theories (con’t) • Production possibility curve - a hypothetical representation that shows tradeoff in production shifting resources between 2 products • Producing more of 1 product reduces production on other • Tradeoff slope represents opportunity cost • http://www.youtube.com/watch?v=uWwrb--yk-w&feature=related • Production possibility curve video

  6. Economic theories (con’t) • Opportunity cost - value of what is given up in producing 1 product when another is produced • Ex) Japan - more efficient producing rice than cotton; focuses more resources on rice • Ex) US - more efficient at producing cotton than rice; focuses more resources on cotton • http://www.investopedia.com/video/play/opportunity-cost/ • Opportunity cost video

  7. Economic theories (con’t) • Commodity - raw material or agricultural product that may be same regardless of who produces it • Ex) Oil from Saudi Arabia - just as valuable as oil from Venezuela • Ex) Rice from US, Japan or Thailand – viewed same by most western consumers

  8. Global factors of production A country’s comparative advantage comes from its global factors of production. The US has available resources in all factors of production 1. Natural resources - includes land, forests, minerals, oil, & bodies of water • Many African countries rich in gold, diamonds & other minerals • Saudi Arabia, Libya, Iraq & Venezuela - rich in oil. • US rich in farmland, fresh water &natural gas.

  9. Global factors of production 2. Human resources - (or labor) includes workers, management & entrepreneurs • Developed countries such as Japan, Germany, UK & US rich in skilled labor & management expertise • China rich in low-cost labor

  10. Global factors of production 3. Capital resources - (or man-made items) includes buildings, machinery & funds • Developed countries such as Japan, Germany, UK & US rich in capital; funds to invest in infrastructure, business ventures. • Underdeveloped countries such as Guatemala, Liberia & Nepal lack capital to invest in infrastructure & business ventures

  11. Comparative advantage of nations • Country’s industries develop through strong internal competition • Ex) Coke vs. Pepsi; AT&T vs. Verizon • Japanese companies - comparative advantage in producing small home electronic devices such as TVs & cameras • US -comparative advantage in entertainment industry, exporting movies & TV shows • Ex) Disney exports theme park management skills to Japan, Hong Kong, etc. • Only the strongest & best producers survive

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