Transcript AP Week 2 - Ector County ISD

See last weeks slide to explain the color codes
AP Week 2
Modules 2-4
Business cycle, PPC, Comparative Advantage and Practice
HOMEWORK THIS WEEK and things graded
• Read modules 2-4
• Learn the bold terms
• Complete either notes from your reading or the red slides on the PP
for each day
• Notebook will be graded for having notes daily- in class, reading and
from PP. (red only unless you miss a day then the gradient)
• Planner
• Group turns in sheets on Thursday and on Friday
• IN CLASS YOU WILL CREATE 2 MODELS ON YOUR BIG CHART- MUST
SHOW TO ME
Monday 1-9-17
Read Module 2 in Krugman’s Economic for AP
Learn the terms
AP Unit 1
The business Cycle
Objective: be able to: draw and label a business cycle, explain the 4 sections and what the business cycle indicates.
You will be able to discuss the historical value and data of the United States’ business cycle using historical data.
Do Now: How do you imagine the business cycle to look?
EQ: Why do we monitor? What is the role of the government?
The overall economic goals or objectives of
the government are:
• Steady economic growth
• Price levels to remain stable (inflation at a steady level)
• Low unemployment
• The business cycle is a graph that helps to show how the economy is
doing over a period of time.
Things you should learn in module 2
• What a business cycle is and why policy makers (government) seek to diminish the
severity of business cycle
• How unemployment and unemployment are measured and how they change over the
business cycle
• How aggregate output and employment changes over the cycle
• Why price stability is the preferred status
• How economic growth determines a countries standard of living and does it really
indicate a complete picture
• How models provide simplified representations to help understand economic concepts
• Terms: business cycle, depression, recessions, expansions, employment, unemployment,
labor force, unemployment rate, output, aggregate output, inflation, deflation, price
stability, economic growth, model, other things equal assumption
• Do the handout from St. Louis Federal Reserve,
• “Why Scarce Resources Are Sometimes Unemployed”
• https://www.youtube.com/watch?v=DmXvUz0qAtw
• Jason Welker “The Business Cycle”- 10 min. without stopping- shows how to draw and what this model indicates, terms defined
• The business cycle model is one often referred to in the media, which likes to use terms like "boom' and 'bust'. It is a model that
can communicate several important pieces of information about a nation's economy. Basically, the business cycles is a graph which
shows the level of real GDP over time. The vertical axis shows the level of GDP, and horizontal axis time.
• A typical nation's business cycle will most likely look like a wave, showing how GDP rises and falls over time. Assuming the country
is achieving economic growth over the long-run, business cycle's 'line of best fit' or 'trend line' will slope upwards, indicating that
over the span of years or decades, a nation's economy will produce more output. But over shorter periods of time, output may
fluctuate, as the economy experiences those 'booms and busts' the media are so fond of.
• There are four fundamental phases in any nation's business cycle:
• 1) Expansion: Also known as the recovery phase, when the nation's output is rising at a rate faster than the long-run trend.
• 2) Peak: This is the end of a period of expansion, when output begins to decline
• 3) Contraction: Also known as the recession phase, when the nation's output is falling over time.
• 4)Trough: This is the end of a period of recession, when output begins to recover (the economy enters an expansion phase again).
• This video lesson will explore the four phases of a nation's business cycles and explain how the goal of macroeconomic policies is
to 'smooth out' the fluctuations in the business cycle, and thereby reduce the amount of uncertainty faced by a nation's
households and firms regarding the future level of economic activity.
Facts and figures on Business Cycle
• A depression is a very deep and prolonged downturn, we have not had one since
1930.
• Recession are less prolonged economic downturns
• National Bureau of Economic Research says we have had 11 recessions in US
since WWII.
• The average last 14 months
• Average expansion lasted 57 months
• Average length of a business cycle from beginning of a recession to beginning of
the next recession is 5 years and 7 months. Shortest was 18 months and longest
was 10 years and 8 months
• Rule of thumb is that a recession is declared with 2 consecutive quarters with a
drop in aggregate output. So 6 months.
• The US has National Bureau of Economic Research (NBER) make the call- not
everyone agrees to their call.
Employment, Unemployment and the
Business Cycle
• Employment is the total number of people currently working for pay
• Unemployment is the total number of people who are actively
looking for work, but are not currently employed
• Labor Force- the sum of employment and unemployment
• Unemployment Rate is the percentage of the labor force that is
unemployed
• Unemployment is never a zero
US employment data
To expand your understanding
http://www.bls.gov/news.release/empsit.t09.htm
as you look at the data note the following:
Are there more males or females working? Does it give us why?
Look at the different age groups do the numbers change? How would you
describe the changes? Why do you think the changes occur?
For those who want a deeper understanding of how the Natural Rate of
Unemployment is determined and its indications this article is a rather
simple explanation to start your quest.
http://www.economicshelp.org/macroeconomics/unemployment/natural_r
ate/
Aggregate Output and the Business Cycle
• The economy is about how much output a country has. Output is the
quantity of goods and services produced
• In macroeconomics we look at the aggregates, the aggregate output
is the economy’s total production of goods and services for a given
time period (a year is common but also by the quarters- 3 months)
• CONNECTION BETWEEN THESE IS THAT AS OUTPUT INCREASES THE
UNEMPLOYMENT DECREASES- THEY HAVE AN INVERSE RELATIONSHIP
Inflation, Deflation and Price Stability
• While wages have risen significantly overtime the reality is that due to
inflation the average worker really has not made gains, they have simply
stayed level.
• Inflation is the rise in the overall price level
• Deflation is the fall in the overall price level
• Disinflation is a fall in the rate of inflation (inflation is still occurring, just at
a lower rate)
• A change in the prices of a few goods simply changes the opportunity cost
of purchasing those goods but does not mean inflation or deflation
What does inflation and deflation do to the
economy?
• Inflation discourages people from holding on to cash- the value of the
cash is falling so they will want to exchange it for something that will
hold its value better
• Deflation can cause people to hold on to their cash rather than invest
it. This can stall a recession or cause it to become worse.
Economic Growth Real GDP per capita has grown
9 times as much as it was in 1900- 2009.
• Many times we look back to periods in history and think, “wow that was a
great time and so much better.” Reality is that a closer look would not
always prove that.
• Take the 1950’s many consider that a great time of prosperity, but by
today’s standards American’s were very poor. This is based on the data
that most homes did not have what is considered necessities like a washer
and AC.
• Economic growth- an increase in the maximum possible output of an
economy- this is indicated by an outward movement of the PPC or an
actual movement of the long run aggregate supply. We measure this with
Real Gross Domestic Product and generally divided by population to give us
the per capita. (pg 13 has graph)
Models used in Economics
• Model- a very simplified version of a reality that is used to better
understand real-life situations
• Economists are not able to put people in a dome and control
everything to see how they react to different situations so they create
models to show what happens. The use of models allows economist
to look at one change at a time- holding all other things equal (ceteris
peribus)
AP Tip• You need to know how to draw and label the business cycle graph as
well as explain the relation to unemployment, output and economic
growth at different phases.
Tuesday Week 2
• Objective: Be able to draw and label a PPC, be
able to define a PPC (PPF), be able to describe the
use of this model to demonstrate the concepts of
scarcity, trade-off and opportunity cost as well as
efficiency and economic growth
• Be able to create visually and verbally explain the
PPC.
• Do Now: annotate and summarize your notes over
the business cycle
EQ: How is the PPC used in economics?
19
Unit 1: Basic
Economic Concepts
http://glencoe.mheducation.com/s
ites/0025694212/student_view0/ch
apter1/paul_solman_videos.html
Paul Solomon
Production Possibility
Curve
http://glencoe.mheducation.com/sit
es/0025694212/student_view0/chap
ter1/paul_solman_videos.html
20
REVIEW
1.
2.
3.
4.
5.
6.
Explain relationship between scarcity and choices
Differentiate between positive & normative
Differentiate between price and cost
Explain the “Invisible Hand” of Capitalism
Differentiate between consumer and capital goods
Give examples of each of the 4 Factors of
Production
7. Define tradeoffs
8. Define opportunity cost
9. Differentiate between accounting costs and
economic costs
21
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but unlimited resources
22
The Production
Possibilities Curve
(PPC)
Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
23
What is the Production Possibilities Curve?
• A production possibilities graph (PPG) is a
model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.
•
•
•
•
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology
24
Production “Possibilities” Table
Bikes
Computers
a
14
0
b
12
2
c
9
4
d
5
6
e
0
8
f
0
10
Each point represents a specific
combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
25
Production Possibilities
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
14
(given current resources)
A
B
12
Bikes
G
C
10
8
Efficient
D
6
Inefficient/
Unemployment
4
2
E
0
0
2
4
6
8
10
Computers
26
Opportunity Cost
Example:
1. The opportunity cost of
moving from a to b is… 2 Bikes
2.The opportunity cost of
moving from b to d is… 7 Bikes
3.The opportunity cost of
moving from d to b is… 4 Computer
4.The opportunity cost of
moving from f to c is… 0 Computers
5.What can you say about point G?
Unattainable
27
The Production Possibilities
Curve (or Frontier)
28
Production Possibilities
CALZONES
PIZZA
A
B
C
D
E
4
0
3
1
2
2
1
3
0
4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are
easily adaptable for producing either good.
• Result is a straight line PPC (not common)
29
Production Possibilities
PIZZA
ROBOTS
A
B
C
D
E
20
0
19
1
16
2
10
3
0
4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
Constant vs. Increasing
Opportunity Cost
Identify which product would have a straight line
PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples
PER UNIT Opportunity Cost
How much each marginal = Opportunity Cost
unit costs
Units Gained
Example:
1. The PER UNIT opportunity cost
of moving from a to b is…
1 Bike
2.The PER UNIT opportunity
cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity
cost of moving from c to d is…
2 Bikes
4.The PER UNIT opportunity
cost of moving from d to e is…
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs
32
The Production Possibilities
Curve and Efficiency
33
Two Types of Efficiency
Productive Efficiency• Products are being produced in the
least costly way.
• This is any point ON the Production
Possibilities Curve
Allocative Efficiency• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society.
34
Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient?
14
A
B
12
Bikes
Productively Efficient
combinations are A through D
G
Allocative Efficient
combinations depend on
the wants of society
10
8
C
E
6
(What if this represents a
country with no electricity?)
4
F
2
D
0
0
2
4
6
8
10
Computers
35
Why two types of efficiency?
Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the
combination society wants
Size 20 running
shoes
A
Size 10 running shoes
Shifting the Production
Possibilities Curve
37
Production Possibilities
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade
38
Robots
Production Possibilities
What happens if
there is an increase
in population?
Pizzas
39
Robots
Production Possibilities
What happens if
there is an increase
in population?
Pizzas
40
Production Possibilities
Robots
What if there is a
technology improvement
in pizza ovens
Pizzas
41
Production Possibilities
Robots
What if there is a
technology improvement
in pizza ovens
Pizzas
42
Capital Goods and Future Growth
Countries that produce more capital goods will have
more growth in the future.
Panama – Favors
Consumer Goods
Mexico – Favors
Capital Goods
Future
PPC
Consumer goods
Panama
Future
PPC
Capital Goods
Capital Goods
Current
PPC
Current
PPC
Consumer goods
Mexico
43
PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. BP Oil Spill in the Gulf
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
44
Question #1
New robot making technology
Q
Robots
A shift only for Robots
Q
Pizzas
45
Question #2
Decrease in the demand for pizza
Robots
Q
The curve doesn’t shift!
A change in demand
doesn’t shift the curve
Q
Pizzas
46
Question #3
Mad cow disease kills 85% of cows
Robots
Q
A shift inward only for
Pizza
Q
Pizzas
47
Question #4
BP Oil Spill in the Gulf
Capital Goods (Guns)
Q
Decrease in resources
decrease production
possibilities for both
Q
Consumer Goods (Butter)
48
Question #5
Faster computer hardware
Capital Goods (Guns)
Q
Quality of a resource
improves shifting the
curve outward
Q
Consumer Goods (Butter)
49
Question #6
Many workers unemployed
Capital Goods (Guns)
Q
The curve doesn’t shift!
Unemployment is just a
point inside the curve
Q
Consumer Goods (Butter)
50
Question #7
Significant increases in education
Capital Goods (Guns)
Q
The quality of labor is
improved. Curve shifts
outward.
Q
Consumer Goods (Butter)
51
AP week 2 Wednesday
Wednesday
Absolute and Comparative Advantage Module 4
Objective: Be able to explain how trade leads to gains for individuals
and the economy and analyze that the impact may not be equal for
everyone. Be able to explain the difference between absolute and
comparative advantage and create charts to demonstrate.
You will be able to calculate the comparative advantage, deduce which
country has the absolute and comparative advantage. You will be able
to write out the equations.
Do Now: complete the PPC that was handed to you as you came in to
demonstrate that you understand how and as a review from yesterday.
Review your notes from yesterday and from your readings.
53
EQ: What does comparative advantage tell us and how do I calculate?
Terms: trade, gains from trade, specialization, comparative advantage,
absolute advantage
54
We are not self sufficient and while we might survive on a deserted island
we would not be able to have as much stuff as if we could trade.
The concept of specialization was a major point if Adam Smith’s 1776
book The Wealth of Nations.
Adam Smith is considered the Father of Economics,
mostly known for the concept of the “invisible hand” and that all
people do what is in their own best interest.
The concept of specialization is that if everyone does what they can do at
the least opportunity cost then trade everyone benefits.
55
Gains from trade
• Even if a country can produce more of all the goods than
another country that country can still benefit from trade.
• Examples are castaways on pgs 24 and on handouts
• The production possibility curve is often used to
demonstrate the comparative advantage
56
• https://www.youtube.com/watch?v=hnGCjwRWtcw
• Jason Welker’s 10 min. video on comparative knowledge
57
Per Unit Opportunity Cost Review
Per Unit Opportunity Cost = Opportunity Cost
Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is
your PER UNIT cost for each shirt?
$10 per shirt
Now, take money our of the equation. Instead of
producing 5 shirts you could have made 10 hats.
1. What is your PER UNIT OPPORTUNITY COST for
each shirt in terms of hats given up?
1 shirt costs 2 hats
2. What is your PER UNIT OPPORTUNITY COST for
each hat in terms of shirts given up?
1 hat costs a half of a shirt
58
Per Unit Opportunity Cost Review
Ronald McDonald can produce 20 pizzas or 200 burgers
Papa John can produce 100 pizzas or 200 burgers
1. What is Ronald’s opportunity cost for one pizza in
terms of burgers given up? 1 pizza cost 10 burgers
2. What is Ronald’s opportunity cost for one burger in
terms of pizza given up? 1 burger costs 1/10 pizza
3. What is Papa John’s opportunity cost for one pizza in
terms of burgers given up? 1 pizza costs 2 burgers
4. What is Papa John’s opportunity cost for one burger
in terms of pizza given up? 1 burger costs 1/2 pizza
Ronald has a COMPARATIVE ADVANTGE in the
production of burgers
Papa John has a COMPARATIVE ADVANTAGE in the
59
production of pizza
Absolute and Comparative Advantage
Absolute Advantage
•The producer that can produce the most output OR
requires the least amount of inputs (resources)
•Ex: Papa John has an absolute advantage in pizzas
because he can produce 100 and Ronald can only
make 20.
Comparative Advantage
•The producer with the lowest opportunity cost.
•Ex: Ronald has a comparative advantage in burgers
because he has a lowest PER UNIT opportunity cost.
Countries should trade if they have a
relatively lower opportunity cost.
They should specialize in the good that is “cheaper” for
them to produce.
60
Additional notes and resources to practice
61
BEFORE WE GET STARTED, ON THE ARTICLE “WHY SCARCE RESOURCES ARE SOMETIMES UNEMPLOYED”
What are the factors of production (the resources)?
What does inefficient have to do with unemployed use of resources? Why did they use Labor as an example?
What are the 3 types of unemployment?
How are frictional and structural similar? What is the significance of structural?
NROU is ? What unemployment is included?
What is cyclical?
How does it correlate to the business cycle?
What causes this form?
Can you explain underemployment?
Is labor the only resource unused? Explain?
• https://www.youtube.com/watch?v=67tHtpac5ws Friedman, Making
a Pencil 2.5 minutes
N. Gregory Mankiw
Economics
Principles of
Sixth Edition
3
Interdependence and the
Gains from Trade
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product or service or otherwise on a password-protected website for classroom use.
Premium PowerPoint
Slides by
Ron Cronovich
In this chapter,
look for the answers to these questions:
• Why do people—and nations—choose to be
economically interdependent?
• How can trade make everyone better off?
• What is absolute advantage?
What is comparative advantage?
How are these concepts similar?
How are they different?
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product or service or otherwise on a password-protected website for classroom use.
64
Interdependence
Every day
hair gel from
you rely on
Cleveland, OH
many people
cell phone
from around
from Taiwan
the world,
most of whom
dress shirt
you’ve never met,
from China
to provide you
with the goods
coffee from
and services
Kenya
you enjoy.
Interdependence
 One of the Ten Principles from Chapter 1:
Trade can make everyone better off.
 We now learn why people—and nations—choose to be
interdependent,
and how they can gain from trade.
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product or service or otherwise on a password-protected website for classroom use.
66
The opportunity cost can be determined by the
slope.
How many did you lose counting down and then
over to create a fraction.
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product or service or otherwise on a password-protected website for classroom use.
67
Our Example
 Two countries: the U.S. and Japan
 Two goods: computers and wheat
 One resource: labor, measured in hours
 We will look at how much of both goods
each country produces and consumes
 if the country chooses to be self-sufficient
 if it trades with the other country
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
68
Production Possibilities in the U.S.
Get out graph paper and
create a PPC
 The U.S. has 50,000 hours of labor
available for production, per month.
 Producing one computer
requires 100 hours of labor.
 Producing one ton of wheat
requires 10 hours of labor.
Based on this data how many computers
and tons of wheat can the US produce?
Create a PPC with wheat on the vertical and
computers on the horizontal.
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product or service or otherwise on a password-protected website for classroom use.
69
The U.S. PPF
Wheat
(tons)
The U.S. has enough labor
to produce 500 computers,
or 5000 tons of wheat,
or any combination along
the PPF.
5,000
4,000
3,000
2,000
1,000
0
Computers
100
200 300 400
500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
70
The U.S. Without Trade
Wheat
(tons)
Suppose the U.S. uses half its labor
to produce each of the two goods.
Then it will produce and consume
250 computers and
2500 tons of wheat.
5,000
4,000
3,000
2,000
1,000
0
Computers
100
200 300 400
500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
71
ACTIVE LEARNING
1
Derive Japan’s PPF
Use the following information to draw Japan’s PPF.
 Japan has 30,000 hours of labor available for
production, per month.
 Producing one computer requires 125 hours of
labor.
 Producing one ton of wheat requires 25 hours
of labor.
Your graph should measure computers on the
horizontal axis.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Japan’s PPF
Wheat
(tons)
Japan has enough labor to
produce 240 computers,
or 1200 tons of wheat,
or any combination
along the PPF.
2,000
1,000
0
Computers
100
200
300
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
73
Japan Without Trade
Wheat
(tons)
2,000
Suppose Japan uses half its labor to
produce each good.
Then it will produce and consume
120 computers and
600 tons of wheat.
1,000
0
Computers
100
200
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
74
Consumption With and Without Trade
 Without trade,
 U.S. consumers get 250 computers
and 2500 tons wheat.
 Japanese consumers get 120 computers
and 600 tons wheat.
 We will compare consumption without trade to consumption with
trade.
 First, we need to see how much of each good is produced and
traded by the two countries.
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product or service or otherwise on a password-protected website for classroom use.
75
ACTIVE LEARNING
2
Production under trade
1. Suppose the U.S. produces 3400 tons of wheat.
How many computers would the U.S. be able to
produce with its remaining labor? Draw the
point representing this combination of
computers and wheat on the U.S. PPF.
2. Suppose Japan produces 240 computers.
How many tons of wheat would Japan be able
to produce with its remaining labor? Draw this
point on Japan’s PPF.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
U.S. Production With Trade
Wheat
(tons)
Producing 3400 tons of wheat
requires 34,000 labor hours.
5,000
4,000
The remaining 16,000
labor hours are used to
produce 160 computers.
3,000
2,000
1,000
0
Computers
100
200 300 400
500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
77
Japan’s Production With Trade
Wheat
(tons)
Producing 240 computers
requires all of Japan’s 30,000
labor hours.
2,000
So, Japan would produce
0 tons of wheat.
1,000
0
Computers
100
200
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
78
Exports & Imports
 Exports:
goods produced domestically and sold abroad
To export means to sell domestically produced goods abroad.
 Imports:
goods produced abroad and sold domestically
To import means to purchase goods produced in other countries.
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ACTIVE LEARNING
3
Consumption under trade
Suppose the U.S. exports 700 tons of wheat to
Japan, and imports 110 computers from Japan.
(So, Japan imports 700 tons wheat and exports
110 computers.)
 How much of each good is consumed in the
U.S.? Plot this combination on the U.S. PPF.
 How much of each good is consumed in
Japan? Plot this combination on Japan’s PPF.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
U.S. Consumption With Trade
Wheat
(tons)
5,000
computers
produced
160
+ imported
110
wheat
3400
0
4,000
– exported
0
700
3,000
= amount
consumed
270
2700
2,000
1,000
0
Computers
100
200 300 400
500
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Japan’s Consumption With Trade
Wheat
(tons)
produced
+ imported
– exported
= amount
consumed
2,000
computers
240
0
110
wheat
0
700
0
130
700
1,000
0
Computers
100
200
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
82
Trade Makes Both Countries Better Off
IT DOES
NOT MEAN
THAT THE
COUNTRIES
CAN
PRODUCE
MORE, BUT
THEY CAN
CONSUME
MORE!
U.S.
consumption
without trade
consumption gains from
with trade
trade
computers
250
270
20
wheat
2500
2700
200
Japan
consumption
without trade
consumption gains from
with trade
trade
computers
120
130
10
wheat
600
700
100
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Where Do These Gains Come From?
 Absolute advantage: the ability to produce a good using fewer
inputs than another producer
 The U.S. has an absolute advantage in wheat:
producing a ton of wheat uses 10 labor hours
in the U.S. vs. 25 in Japan.
 If each country has an absolute advantage
in one good and specializes in that good,
then both countries can gain from trade.
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84
Where Do These Gains Come From?
 Which country has an absolute advantage in computers?
 Producing one computer requires
125 labor hours in Japan,
but only 100 in the U.S.
 The U.S. has an absolute advantage in both goods!
So why does Japan specialize in computers?
Why do both countries gain from trade?
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product or service or otherwise on a password-protected website for classroom use.
85
Two Measures of the Cost of a Good
SOMETIMES THEY DO WITH
INPUT
OTHER TIMES IT IS OUTPUT
 Two countries can gain from trade when each specializes in the
good it produces at lowest cost.
 Absolute advantage measures the cost of a good in terms of the
inputs required to produce it.
 Recall:
Another measure of cost is opportunity cost. (OUTPUT)
 In our example, the opportunity cost of a computer is the amount of
wheat that could be produced using the labor needed to produce
one computer.
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86
Opportunity Cost and
Comparative Advantage
 Comparative advantage: the ability to produce
a good at a lower opportunity cost than another
producer
 Which country has the comparative advantage in
computers?
 To answer this, must determine the opportunity
cost of a computer in each country.
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87
Opportunity Cost and
Comparative Advantage
 The opportunity cost of a computer is
 10 tons of wheat in the U.S., because producing
one computer requires 100 labor hours,
which instead could produce 10 tons of wheat.
 5 tons of wheat in Japan, because producing
one computer requires 125 labor hours,
which instead could produce 5 tons of wheat.
 So, Japan has a comparative advantage in
computers. Lesson: Absolute advantage is not
necessary for comparative advantage!
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Comparative Advantage and Trade
 Gains from trade arise from comparative advantage (differences
in opportunity costs).
 When each country specializes in the good(s)
in which it has a comparative advantage,
total production in all countries is higher,
the world’s “economic pie” is bigger,
and all countries can gain from trade.
 The same applies to individual producers
(like the farmer and the rancher) specializing
in different goods and trading with each other.
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89
ACTIVE LEARNING
4
Absolute and comparative advantage
Argentina and Brazil each have 10,000 hours of
labor per month.
In Argentina,
 producing one pound coffee requires 2 hours
 producing one bottle wine requires 4 hours
In Brazil,
 producing one pound coffee requires 1 hour
 producing one bottle wine requires 5 hours
Which country has an absolute advantage in the
production of coffee? Which country has a
comparative advantage in the production of wine?
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ACTIVE LEARNING
Answers
4
Brazil has an absolute advantage in coffee:
 Producing a pound of coffee requires only one
labor-hour in Brazil, but two in Argentina.
Argentina has a comparative advantage in wine:
 Argentina’s opp. cost of wine is two pounds of
coffee, because the four labor-hours required
to produce a bottle of wine could instead
produce two pounds of coffee.
 Brazil’s opp. cost of wine is five pounds of
coffee.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unanswered Questions…
 We made a lot of assumptions about the quantities
of each good that each country produces, trades,
and consumes, and the price at which the countries
trade wheat for computers.
 In the real world, these quantities and prices would
be determined by the preferences of consumers
and the technology and resources in both countries.
 We will begin to study this in the next chapter.
 For now, though, our goal was merely to see how
trade can make everyone better off.
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S U MMA RY
• Interdependence and trade allow everyone to
enjoy a greater quantity and variety of goods &
services.
• Comparative advantage means being able to
produce a good at a lower opportunity cost.
Absolute advantage means being able to produce
a good with fewer inputs.
• When people—or countries—specialize in the
goods in which they have a comparative
advantage, the economic “pie” grows and trade
can make everyone better off.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Thursday
 Objective: Be able to demonstrate the ability to create and analyze
PPC and a business cycle for historical periods of the USA.
 You will work in small groups to analyze movements and changes to
the PPC and the business cycle. You will verbalize as well as record
your findings
 Do Now: With your shoulder partner quiz one another over terms we
have learned this week. What are your weak ones? Strong ones?
 EQ: How do the models of the PPC and the BC relate? How do they
demonstrate the concept of scarcity, economic growth and how do they
reflect those concepts as well as unemployment?
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 Complete a hand out each so that you have one in your notebook
for a resource, turn them all in together to demonstrate that your
group all understands these concepts.
 Make sure everyone in your group understands how to draw
these two models and has them correctly drawn on their big chart.
If there are discrepancies then identify and resolve.
 If you finish early then practice vocabulary terms
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95
Friday
 Objective: you will be able to solve a free response question from
a prior AP test.
 You will work in small groups to answer different questions and
then swap the questions.
 Do Now: Review your vocabulary terms
 EQ: How do I tackle a FRQ?
 Each group will be asked to demonstrate their understanding on
one or more of the FRQ in a random draw. Model your thought
process. Identify terms that provide you insight in what the
question is actually asking.
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96