Transcript Module Comparative Advantage and Trade

4
Module
Comparative
Advantage and Trade
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How trade leads to gains for an individual
or an economy
• The difference between absolute
advantage and comparative advantage
• How comparative advantage leads to
gains from trade in the global marketplace
Gains from Trade
• Trade
• Gains from trade
• Specialization
• The importance of
markets
Comparative Advantage and
Gains from Trade
• Comparative
Advantage
• Terms of Trade
• Absolute Advantage
Production Possibilities for
Two Countries
Production Possibilities for
Two Countries
Will these two countries gain from trade if 100
units of malaria medicine are traded for 200
cotton shirts?
To find out:
1. Calculate the opportunity costs of production
for each country
2. Determine the comparative advantage for
each country
3. Determine if the terms of trade are mutually
beneficial
Production Possibilities for
Two Countries
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
Production Possibilities for
Two Countries
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
The United States has a comparative
advantage in Malaria Medicine (M) because
they only give up 1 cotton shirt while
Bangladesh must give up 3 cotton shirts to
gain 1 unit of medicine.
Bangladesh has a
comparative advantage in
Cotton Shirts (C) because
they only give up 1/3 unit of
medicine while The United
States must give up 1 unit of
medicine to gain 1 cotton
shirt.
Production Possibilities for
Two Countries
The terms of trade are
mutually beneficial as long as
they are between the two
countries’ opportunity costs.
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine
(M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C
For example, any amount of
medicine greater than 1/3
and less than 1 traded for 1
cotton shirt would represent
mutually beneficial terms of
trade.
Likewise, any number of
cotton shirts greater than 1
and less than 3 traded for 1
unit of medicine would
represent mutually beneficial
terms of trade.
Figure 4.1 Production Possibilities for Two Castaways
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 4.1 Tom’s and Hank’s Opportunity Costs of Fish and
Coconuts
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 4.2 How the Castaways Gain from Trade
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 4.2 Comparative Advantage and Gains from Trade
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 4.3 Comparative Advantage and International Trade
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers