Name: ____________________________________________________________________________________________
CHAPTER 3 – Interdependence and the Gains from Trade
Activator
Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like
water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and
educated. He is also, faster, better, more productive at everything. The second man is old, weak, and
uneducated. He produces less than the younger man. In some activities the difference between the two is great;
in others it is small. For instance, the younger man can gather 50 coconuts every hour, or catch 150 fish. While
the older man can only gather 5 coconuts or catch 25 fish every hour.
1.
2.
3.
4.
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Who is better at all activities in the scenario above? ______________________
What is the opportunity cost for the younger man if he dedicates his hour to gathering coconuts? ____________
What is the opportunity cost for the older man if he dedicates his hour gathering coconuts________________
Should they work separately or together on the island? Explain. _______________________________________
___________________________________________________________________________________________
Absolute Advantage – person or nation can ________________________________________________________
___________________________________________________________________________________________
Comparative Advantage – the ability to produce ____________________________________________________
___________________________________________________________________________________________
Law of comparative advantage – a nation or person is _______________________________________________
___________________________________________________________________________________________
Coconuts or Fish?
Comparative Advantage
Absolute Advantage
Coconuts
Coconuts
Fish
Young
Young
Old
Old
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Fish
OGO – “Other goes over” method shows the _______________________________________________________
Young Man has ______________________________ advantage because he can __________________________
___________________________________________________________________________________________
Young Man has ______________________________ advantage because he _____________________________
____________________________________________________________________________than the old man.
His opportunity cost for collecting coconuts is ____________________________ relative to the old man.
The old man has the ________________________ advantage in catching fish because he gives ______________
___________________________________________________________________________________________
His opportunity cost for catching fish is ________________________________ relative to the young man.
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Steps for Determining Comparative Advantage
o Scenario: Canada and Mexico are considering the trade of two goods. Canada can produce 100 Furs or
100 trees. Mexico can produce 50 furs or 200 trees.
Step 1 – Input the Data
Productive Output
Fur
Trees
Canada
Mexico
Step 2 – Find the Opportunity Cost of Production
Opportunity Cost
Fur
Trees
Canada
_____ ÷_____ = _____
_____ ÷_____ = _____
Mexico
_____ ÷_____ = _____
_____ ÷_____ = _____
Step 3 – Analyze the data to determine comparative advantage
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•
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It costs Canada ______ fur for every tree it produces.
It costs Mexico ______ fur for every tree it produces.
It costs Canada ______ tree for every fur it produces.
It costs Mexico ______ tree for every fur it produces.
Therefore, ____________________________ should specialize in the production of Fur, while
_____________________________ should specialize in the production of trees
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Kate and Carl
Productivity Per Hour
T-Shirts per hour
Birdhouses per hour
Kate
6 _____ ÷_____ = _____
2_____ ÷_____ = _____
Carl
1 _____ ÷_____ = _____
1 _____ ÷_____ = _____
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Who has absolute advantage in this situation?
It costs Kate ________ birdhouses to produce 1 t-shirt.
It costs Kate ________ shirts to produce 1 birdhouse.
It costs Carl ________ to produce 1 t-shirt.
It costs Carl ________to produce 1 birdhouse.
________ has a comparative advantage when producing t-shirts.
________ has a comparative advantage when producing birdhouses.
Therefore, ___________ should produce t-shirts and __________ should produce birdhouses.
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Application Questions – pgs. 58 – 59
Should Tiger Woods Mow His Own Lawn?
1. What does Tiger Woods hold an absolute advantage in? __________________________________________
2. What does Forrest Gump have a comparative advantage in? _______________________________________
3. What is the opportunity cost for both Tiger and Forrest for mowing the lawn?_________________________
________________________________________________________________________________________
4. Why are the gains from trade beneficial in this scenario?__________________________________________
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Should The United States Trade With Other Countries?
Create a chart to show the production of cars and food in the U.S. and Japan.
Productivity
Cars per month
Tons of food per month
US
_____ ÷_____ = _____
_____ ÷_____ = _____
Japan
_____ ÷_____ = _____
_____ ÷_____ = _____
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1.
2.
3.
4.
What is the opportunity cost for both countries production of cars and food?
o Japan 1 ton of food or _________________ car per month.
o US 2 tons of food per month or _________________ car per month.
Who has a comparative advantage in the production of each?
o Cars _________________________________________
o Food _________________________________________
Application Question Comparative Advantage
A Japanese worker can produce 6 units of steel or 3 televisions per hour. A South Korean worker can produce 8
units of steel or 2 televisions per hour.
Determine opportunity cost for each country using the table below.
Create two graphs that summarize all the possible choices that they can produce.
Indicate the absolute and comparative advantage based on the table below.
What should be the range of prices at which each country would be willing to exchange?
o Japan ___________ Korea ____________
Productivity
Steel per hour
TVs per hour
Japan
_____ ÷_____ = _____
_____ ÷_____ = _____
Korea
_____ ÷_____ = _____
_____ ÷_____ = _____
Application Question cont…
Steel
Steel
Japan
TVs
Korea
TVs
Gains from Trade:
Suppose that Japan and South Korea settle on a trading price of 3 units of steel for 1 television (or 1/3 of a television for
1 unit of steel). Plot the new points based on gains from trade
1. Japan produces 3 TVs, exporting 1 for 3 units of steel.
2. South Korea produces 8 units of steel, and exports 3 units for 1 television, this allows them to consume
5 units of steel and 1 television.
What were the gains from trade?
Japan __________________
South Korea __________________
Gains from trade Application
1. Two people are academics who are paid for how many papers they produce. In one year Jane can write 4
economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out
who should be the lawyer and who should be the economist.
 Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity
cost in the chart below
Economics Papers
Productivity Per Year
Economics Papers
Law Papers
Jane
John
Economics Papers
Economics Papers
Jane
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Law Papers
John
Law Papers
They end up producing a total of 9 papers, 6 law papers and 3 economics papers. They decide to trade one law
paper for one of economics papers; Jane ends up with 5 law papers and 1 economics paper while John can have
1 law paper and 2 economics papers
Plot the new points on the above PPFs.
What were the gains from trade? ___________________________________________________________