Comparative advantage
Today: An introduction to the
advantages of trade
Becky’s linear production
possibilities curve
Becky’s linear production
possibilities curve


What points
are
attainable?
What points
are efficient?
Attainable and efficient points

Efficient points



Any point on the production possibility curve
These points are efficient, since additional
production of one good necessarily means that
another good has lower production
Attainable points

F/B define an attainable point to be “any
combination of goods that can be produced using
currently available resources” (p. 43)
Back to Becky



Efficient
points: w,
x, y, z, v
Attainable
points: t, w,
x, y, z, v
Unattainable
point: u
Next, let’s look at a twoperson economy

Suppose
that
Barbara
and Sherry
have the
Production
Possibility
Curves
(PPCs) as
shown
Next, let’s look at a twoperson economy

Barbara can do
one of the
following:



Copy 50 tests
if she does not
type letters
Type 25 letters
and copy no
tests
Something in
between
Next, let’s look at a twoperson economy

Sherry can do
one of the
following:



Copy 25 tests
and do nothing
else
Type 50 letters
and do nothing
else
Something in
between
Opportunity cost


How much of one
activity needs to be
given up in order to
do one more of the
other?
Example: Barbara
could type one less
letter in order to
copy two more
tests
Absolute advantage and
comparative advantage

Absolute advantage


“One person has an absolute advantage over
another if he or she takes fewer hours to perform
a task than the other person” (F/B p. 36)
Comparative advantage

“One person has a comparative advantage over
another if his or her opportunity cost of
performing a task is lower than the other person’s
opportunity cost” (F/B p. 37)
New example
Productivity in
pizza production
Productivity in salad
production
Greg
20 pizzas cooked
per hour
10 salads made per
hour
David
16 pizzas cooked
per hour
4 salads made per
hour
Drop units to save space


Notice that
Greg has
absolute
advantage in
producing
both pizzas
and salads
Greg
David
Productivity Productivity in
in pizza
salad
production
production
20 / hour
10 / hour
16 / hour
4 / hour
However, we will see that each person has a
comparative advantage in producing one of the
goods
Comparative advantage

Before we can determine comparative
advantage, we must ask about each
person “how much of ____ must I give
up in order to produce an additional
____?”

In other words, we need to determine the
opportunity cost of making one more pizza
or one more salad for both Greg and David
Opportunity cost table
Greg
David

Opportunity cost Opportunity cost of
of cooking a pizza
making a salad
½ salad
2 pizzas
¼ salad
4 pizzas
Note that the two numbers in each row
are mathematical inverses of each other
Comparative advantage
Greg
David

Opportunity cost Opportunity cost of
of cooking a pizza
making a salad
½ salad
2 pizzas
¼ salad
4 pizzas
To find comparative advantage for each
person, find the lowest number in each
column
Comparative advantage
Greg
David


Opportunity cost Opportunity cost of
of cooking a pizza
making a salad
½ salad
2 pizzas
¼ salad
4 pizzas
David has comparative advantage in cooking pizzas
Greg has comparative advantage in making salads
Some things to note

Absolute advantage


The same person could have absolute
advantage in everything
Comparative advantage in a twoperson, two-good economy

Each person will almost always have
comparative advantage in exactly one of
the two goods
From Greg and David to a big
economy

To produce an efficient point in an
economy, each good needs to be
produced with lowest opportunity cost
All units in
this graph
in millions
From Greg and David to a big
economy

Notice that opportunity cost of pizzas
increases from A to C

Opportunity cost increases as more is produced
All units in
this graph
in millions
Changes in a production
possibilities curve

Some factors that can shift a production
possibilities curve




Change in population
War
Investment in buildings, machines, and
other forms of capital
Research and development in technology
From comparative advantage
to trade


Recall that Greg had comparative
advantage at making salads, while
David’s was making pizzas
Greg could make more salads than he
wants to eat and trade them for pizzas
from David

Both can be made better off with trade
International trade


In the real world, trade is more complex than
simple two-good economies
When trade becomes more open between
countries, there are typically millions of
winners and often only thousands of losers


Prices go down for goods on average
The few displaced workers must find an alternate
form of work, typically at a lower wage
International trade



We will examine more about international
trade in the next lecture
For more on international trade, read Ch. 9
Think about how trade benefits your
everyday life

Example: You could speculate about the price of
gas if OPEC countries stopped producing oil