3 .1 A2 HL Comparative Advantage and Trade

1. 3.1 A2 HL Comparative Advantage and Trade

2. What determines greater efficiency or lower costs? Costs of production varies between countries because of “factor endowments” – types of factors of production a country is “gifted” with. Task: Think of a country’s 2 or 3 major exports • Research the relevant factor endowments

3. A Parable for comparative advantage • Imagine . . . • only two goods: potatoes and meat • only two people: Mr. Jones and a Mrs. Choi • Should they each produce for their own needs or should they trade?

4. Who is most efficient at each product?Would you think there’s a good reason to trade? The producer that requires a smaller quantity of inputs (in this case, hours of labour) to produce a good is said to have an absolute advantage in producing that good. Does that mean Mrs. Choi has no reason to trade?

5. A 1 2 Consider Mr. Jone’s Production – and consumption – Possibilities Frontier Meat (pounds) 2 0 4 Potatoes (pounds)

6. B 2 2.5 Mrs. Choi’s Production – and consumption – Possibilities Frontier Meat (pounds) 4 5 0 Potatoes (pounds)

7. Compare the Opportunity Cost for each person producing Meat and Potatoes The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. Who has the comparative advantage for a) meat b) potatoes?

8. The Gains from Trade: Suppose the “terms of trade” is 0.66 Lbs. of meat for 1 Lbs. of Potatoes:using the data below, calculate how much each person has gained.Can you show the new “consumption frontier” after trade (on each PPF) has increased? That’s why it’s good to trade even for Mrs. Choi!

9. Limitations of the theory To what extent are these assumptions valid? • there is perfect knowledge of cheapest products • No cost is involved for transportation • Only 2 countries that trade • costs do not change, there are no EoS • The goods traded are identical • FoP remain in the country • Trade is perfectly free