Transcript 1/10 - cungeheier

Production Possibilities Curves,
Absolute Advantage & Comparative
Advantage
U.S. and Canada
Illustration
For a more detailed example go to: Reffonomics.com.
http://www.reffonomics.com/pp3.html
Production Possibilities
• Two countries can produce the same two
products using its limited amount of
resources.
• Make a graph to show the production
possibilities of each country in producing
the products.
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
60,000
Root Beer
Glasses
80,000 160,000
200,000
Glasses
Glasses
Root Beer
Glasses
0
A
2 mil
0
A
160,000
B
1.4 mil
60,000
B
80,000
80,000
C
0
200,000
C
0
160,000
(Reff)
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
0
60,000
200,000
Glasses
0
80,000 160,000
Glasses
• If the U.S. uses all of its limited resources it can
produce 2 mil barrels of Root Beer and no
glasses.
• If Canada uses all of its limited resources it can
produce 160,000 barrels of Root Beer and no
glasses
(Reff)
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
60,000
200,000
Glasses
80,000 160,000
Glasses
• If the US uses its limited resources efficiently, it
can produce 1.4 mil. barrels of Root Beer and
60,000 glasses.
• If Canada uses it limited resources efficiently, it
can produce 80,000 barrels of Root Beer and
80,000 glasses.
(Reff)
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
0
60,000
200,000
Glasses
0
80,000 160,000
Glasses
• If the U.S. uses all of its limited resources
it can produce 60,000 glasses and no
Root Beer.
• If Canada uses all of its limited resources
it can produce 160,000 glasses and no
Root Beer.
(Reff)
Absolute Advantage
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
60,000
• Root Beer:
200,000
Glasses
80,000 160,000
Glasses
– US can produce 2 million barrels
– Canada can only produce 160,000
US then has the absolute advantage in producing Root Beer
(Reff)
Absolute Advantage
United States
Canada
Root Beer
Root Beer
2 mil
160,000
1.4 mil
80,000
60,000
• Glasses:
200,000
Glasses
80,000 160,000
Glasses
– US can produce 200,000
– Canada can only produce 160,000
US then has the absolute advantage in producing glasses.
(Reff)
Comparative Advantage Table:
Canada
• 1 RB barrel =
• 1 glass =
1
1 glasses
RB barrel
160,000 / 160.000 = 1 to 1
160,000 / 160,000 = 1 to 1
(Reff)
Comparative Advantage Table:
United States
• 1 RB barrel = 1/10 glasses
• 1 glass = 10 RB barrel
2 million / 200,000 = 1 to 1/10
200,000 / 2 million = 1 to 10
(Reff)
Comparative Advantage
• Lower marginal opportunity production
cost of Root Beer:
– U.S. only gives up 1/10 of a glass to produce
1 barrel of Root Beer
– Canada has to give up 1 glass to produce 1
barrel of Root Beer
U.S. has the comparative advantage over
Canada, so the U.S. should produce Root
Beer.
(Reff)
Comparative Advantage
• Lower marginal opportunity production
cost of glasses:
– U.S. gives up 10 barrels of Root Beer to
produce 1 glass.
– Canada only gives up 1 barrel of Root Beer
to produce 1 glass.
Canada has the comparative advantage over
the U.S., so Canada should produce glasses.
(Reff)
Time to Trade!
• US trades Canada 350,000 barrels of Root Beer for
70,000 glasses.
Gains from
Produces
Trades (+ -)
CaS&T
CvS&T
Trade
2 mil RB
- 350,000
1.65 mil
1.4 mil
250,000
0 glasses
+ 70,000
70,000
60,000
10,000
+ 350,000
350,000
80,000
270,000
- 70,000
90,000
80,000
10,000
U.S.
Canada
0 RB
160,000 glasses
CaS&T = Consumers after Specialization and Trade (produces – trade)
CbS&T = Consumers before Specialization and Trade
Trade (CaS&T – CbS&T)
(Reff)
Who benefited from the Trade?
• Both countries benefited from the specialization
and trade:
– U.S. could only produce 1.4 mil barrels of RB, if it
produced 60,000 glasses; remaining production of
1.65 barrels of RB = gain of 250,000 and 70,000
glasses = gain of 10,000.
– Canada could only produce 80,000 barrels of RB, if it
produced 80,000 glasses; received 350,000 barrels
of RB = gain of 270,000 and remaining production of
90,000 glasses = gain of 10,000.
Works Cited
• Reff, Steven and Dick Brunelle.
“Introduction to Marco Economics.”
Reffonomics.com. 25 Jul 2008.
http://www.reffonomics.com/pp3.html