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Absolute and Comparative Advantage

Absolute and Comparative Advantage. Absolute Advantage. A country can produce a product more efficiently than can another country. This can be determined by climate, resources, and location. Ex. Lobster Can you think of other examples?. Comparative Advantage.

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Absolute and Comparative Advantage

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  1. Absolute and Comparative Advantage

  2. Absolute Advantage • A country can produce a product more efficiently than can another country. • This can be determined by climate, resources, and location. • Ex. Lobster • Can you think of other examples?

  3. Comparative Advantage • The ability to produce a product relatively more efficiently, or at a lower cost. • Opportunity cost determines this….how much would one country have to give up to produce a good? • Ex. Oil • Saudi Arabia

  4. What does this mean in the real world? • Columbian Coffee for US machinery • Oil for military aircraft • NAFTA tomorrow

  5. Barriers to International Trade

  6. Tariffs Protective Tariffs Revenue Tariffs • High enough to protect less-efficient domestic industries. • Ex. It costs $1 to produce a pencil in the US but only .35 in another country. How much would they tariff have to be to protect it? • High enough to generate revenue but not prohibit the import. • Duty taxes…not needed today. Look on page 232. • Why is so little gained from this? Why doesn’t the government use it more?

  7. Quota • If foreign goods cost so little, then the government can limit the imports. • In the past this has worked for cars. • What about the future?

  8. Arguments for Protection • Protectionists • Favor trade barriers that protect domestic industries • Free Traders • Favor fewer or even no trade restrictions.

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