US – What Are We Good At?
America's Leading Exports
(in billions of dollars)
1 Civilian Aircraft
74
2 Semiconductors
50.6
3 Cars
49.6
4
Pharmaceutical
Preparations
5 Car Accessories
40
39.9
What Are Other Countries Good At?
Chapter 3 – Interdependence and the Gains from Trade
Absolute Advantage – person or nation can produce more of a given
product using a given amount of resources
Comparative Advantage – the ability to produce a product with less
opportunity cost
Law of comparative advantage – a nation is better off when it
produces goods and services for which it has a comparative
advantage
or
Output vs. Input
Output – final good or service, maximum amount that can be produced
“How much is produced”
Ex. China manufactured 2 million Iphones last year
Input – resources "put in" to the economy that will help to produce an output; shows the
number of resources required to produce a specific amount
“How much is necessary to produce”
Land, Labor, Capital (F.O.P.)
Ex. It takes China 1 hour to produce 1 Iphone, it takes 6 workers, it takes 2 factories, etc.
Output vs. Input
1.
2.
3.
4.
5.
6.
7.
8.
output
The United States manufactured 2000 airplane engines last year ___________________
input
It takes the average worker 3 hours to produce a textile in China __________________
output
Saudi Arabia can produce up to 11 million barrels of crude oil per day ________________
input
It takes 1 machine to cultivate a farm (it used to take 10 people) __________________
McDonalds requires 2 acres of property to build a restaurant ______________________
input
output
McDonalds has the capability of producing 8500 burgers per minute ________________
input
It takes 2 hours and four workers to unload a truck at Wal-Mart ____________________
output
The United States produced 2000 tons of soybeans last year ____________________
Activator Chapter 3 – Interdependence and the Gains from Trade
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, the second
man is old. The younger man can gather 60 coconuts
every hour, or catch 20 fish. While the older man can
only gather 20 coconuts or catch 10 fish every hour.
Coconuts or Fish? Output Question
Productivity
Coconuts
Fish
Young Man
60
20
Old Man
20
10
Coconuts or Fish? Output Question
Productivity
Coconuts
Fish
Young Man
60
20
Old Man
20
10
Young Man has absolute advantage because he can
produce both items more efficiently than the old
man
Output Method
Comparative Advantage
Coconuts
Fish
Young Man
60 20/60 = 1/3 F 20
60/20 = 3 C
Old Man
20 10/20 = 1/2 F 10
20/10 = 2 C
OGO – “Other Goes Over” method shows the
opportunity cost of production
Per Unit Opportunity Cost
Total Cost/Total Production
Young Man
1 Coconut = 1/3 Fish
1 Fish = 3 Coconut
Old Man
1 Coconut = 1/2 Fish
1 Fish = 2 Coconut
=
=
=
=
Output Method
Comparative Advantage
Coconuts
Fish
Young Man
60 20/60 = 1/3 F 20
60/20 = 3 C
Old Man
20 10/20 = 1/2 F 10
20/10 = 2 C
Young Man has comparative advantage in
collecting coconuts because he gives up less
fish relative to his production of coconuts than
the old man
His opportunity cost for collecting coconuts is lower
relative to the old man
The old man has the comparative advantage in
catching fish because he gives up less coconuts
relative to his production of fish
His opportunity cost for catching fish is lower
Important Note: the only time two
people/nations/firms will not trade is if there is no
comparative advantage, opportunity cost is the same.
Coconuts or Fish? Input Question
Productivity
1 Coconuts
1 Fish
Young Man
1 hr.
2 hrs.
Old Man
3 hrs.
12 hrs.
Young Man has absolute advantage because he can
produce both items more efficiently than the old
man
Coconuts or Fish? Input Question
Absolute Advantage
1 Coconuts
1 Fish
Young Man
1 hr.
2 hrs.
Old Man
3 hrs.
12 hrs.
Young Man has absolute advantage because he can
produce both items more efficiently than the old
man
Input Method
Comparative Advantage
Coconuts
Fish
Young Man
1 hr. 1/2
2 hrs. 2/1 = 2
Old Man
3 hrs. 3/12 = 1/4 12 hrs. 12/3 = 4
IOU – “Input - Other Goes Under” method shows
the opportunity cost of production
Total Production/Total Cost
Determining Comparative Advantage
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.
Productivity
Fur
Canada
Mexico
Trees
100 100/100 = 1 T 100 100/100 = 1 F
50
200/50 = 4 T 200 50/200 = 1/4 F
1
•It costs Canada ______
fur for every tree it produces.
1/4 fur for every tree it produces.
•It costs Mexico ______
1 tree for every fur it produces.
•It costs Canada ______
4 tree for every fur it produces.
•It costs Mexico ______
•Therefore, Canada should specialize in the production of
Fur, while Mexico should specialize in the production of
trees
Determining Comparative Advantage
Hours per Car/Cheese
1 Car
1 Ton of Cheese
US
15 15/5 = 3 CH 5
5/15 = 1/3 CAR
China
4 4/2 = 2 CH
2/4 = 1/2 CAR
2
China has comparative advantage in car production
US has a comparative advantage in Cheese
production
Kate and Carl
Productivity Per Hour
1.
2.
3.
4.
5.
6.
7.
Opportunity cost of a
T-Shirts
Opportunity cost of a
Birdhouse
Kate
1/3 birdhouse
2/6 = _____
3 t-shirt
6/2 = ______
Carl
1 birdhouse
1/1 = _____
1 t-shirt
1/1 = ______
1/3 birdhouses to produce 1 t-shirt.
It costs Kate ________
3
It costs Kate ________
shirts to produce 1 birdhouse.
1
It costs Carl ________
to produce 1 t-shirt.
It costs Carl ________to
produce 1 birdhouse.
1
Kate has a comparative advantage when producing t-shirts.
________
Carl
________
has a comparative advantage when producing birdhouses.
Kate
Carl
Therefore, ___________
should produce t-shirts and __________
should produce birdhouses.
Karateconomics
Absolute and Comparative Advantage Practice
Rice
Beans
India
20
10
United Kingdom
5
15
•Which country enjoys an absolute advantage in beans? United Kingdom
•Which country enjoys an absolute advantage in rice? India
Absolute and Comparative Advantage Practice
Rice
Beans
India
20
10
United Kingdom
5
15
•Which country enjoys an absolute advantage in beans? United Kingdom
•Which country enjoys an absolute advantage in rice? India
Absolute and Comparative Advantage Practice
Productive Output
Rice
Beans
India
20 10/20 = 1/2 Beans
10
20/10 = 2 Rice
United Kingdom
5
15
5/15 = 1/3 Rice
15/5 = 3 Beans
Who has the higher opportunity cost when producing Rice? UK
Who has the higher opportunity cost when producing Beans? India
Who has comparative advantage when producing Beans? UK
Who has comparative advantage when producing Rice? India
Therefore, India should specialize in the production of, Rice
while the U.K. should specialize in the production of Beans
Absolute and Comparative Advantage Practice
Productive Output
Fish
Vegetables
Country X
14
Country Y
14 15/14 = 1.07 Vegs
10/14 = .71 Vegs
10
14/10 = 1.4 Fish
15 14/15 = .93 Fish
Which of the following is true?
a. Country Y has absolute advantage in producing both fish and
vegetables, but comparative advantage in fish.
b. With trade, country X will import fish.
c. Country Y has comparative advantage in producing fish.
d. These countries will not be able to benefit from specialization and
trade.
e. Country X will export fish to country Y.
Answer: _____e________
Absolute and Comparative Advantage Practice
Productive Output
Guns
Butter
Russia
60
20
Cuba
30
10
•Which country enjoys an absolute advantage? Russia
Absolute and Comparative Advantage Practice
Productive Output
Guns
Butter
Russia
60 20/60 = 1/3 Butter
20
60/20 = 3 Guns
Cuba
30 10/30 = 1/3 Butter
10
30/10 = 3 Guns
9.
10.
11.
12.
13.
14.
For every Gun that Russia produces, they give up _____1/3________ Butter.
For every Butter that Russia produces they give up ____3________ Guns.
For every Gun that Cuba produces they give up ______1/3_____ Butter.
For every Butter that Cuba produces they give up _____3_______ Guns.
Why is there no comparative advantage? Opportunity Cost is the same
Therefore, the two countries should not trade is when their opportunity cost
is__________equal/the same____________________
Absolute and Comparative Advantage Practice
Cars
Bikes
Italy
4
2
Morocco
5
1
•Which country enjoys an absolute advantage in cars? Italy
•Which country enjoys an absolute advantage in bikes? Morocco
Absolute and Comparative Advantage Practice
Cars
Bikes
Italy
4
4/2 = 2 Bikes
2
Morocco
5
5/1 = 5 Bikes
1
2/4 = 1/2 Cars
1/5 Cars
•Who has the higher opportunity cost when producing cars? Morocco
•Who has the higher opportunity cost when producing bikes? Italy
•Who has the comparative advantage when producing cars? Italy
•Who has the comparative advantage when producing bikes? Morocco
•Therefore, Italy should specialize in the production of cars while Morocco should
specialize in the production of bikes
Daily Ten #1 - Shirts and Shoes
Identify the country of origin for your shirts and shoes.
Article
Shirts
Shoes
Should Tiger Woods Mow His
Own Lawn?
How can people benefit from
specialization and trade?
Tiger Tiger Woods Y’all!
Tiger can mow his lawn in only two hours,
but he can also make $10,000 in two hours
doing appearances.
Tiger has a neighbor, Forrest.
It will take Forrest 4 hours to mow
Tiger’s lawn. Forrest could also spend
those 4 hours working at McDonald’s
for $20 total.
Should Tiger mow his
own lawn?
What is each person’s Opportunity Cost of mowing Tiger’s lawn?
Lawn
Work
Tiger
1 hour
$10,000
Forrest
4 hours
$20
Who mows lawns the best?
Who makes more money working?
How can Tiger benefit from Forrest?
Specialization
Terms of Trade
Terms of trade – rate of exchange wherein both parties mutually benefit
Gains from Trade – refers to the net benefits to agents from voluntary
trading with each other; the specific amount that each party benefits through
trade
Comparative Advantage
Coconuts
Fish
Young Man
60 20/60 = 1/3 F
20
60/20 = 3 C
Old Man
20 10/20 = 1/2 F
10
20/10 = 2 C
or
or
What Should be the Terms of Trade?
Less than 3
Coconuts
1 Fish for 2 ½
Coconuts
More than 2
Coconuts
Coconuts or Fish? Terms of Trade
Comparative Advantage
Coconuts
Young Man
60 20/60 = 1/3 F 20
60/20 = 3 C
Old Man
20 10/20 = 1/2 F 10
20/10 = 2 C
YM: 1 Fish costs 3 Coconut
OM: 1 Fish costs 2 Coconut
Terms of Trade
1 Fish for 2.5 Coconuts
Fish
Fish
1
YM
OM
1
2
2.5
3
Coconuts
Coconuts or Fish? Terms of Trade
Comparative Advantage
Coconuts
Fish
Young Man
60 20/60 = 1/3 F 20
60/20 = 3 C
Old Man
20 10/20 = 1/2 F 10
20/10 = 2 C
Coconuts
YM: 1 Coconut costs 1/3 Fish
OM: 1 Coconut costs 1/2 Fish
Terms of Trade
1 Coconut for .44 Fish
1
OM
YM
1/3
.44
1/2
2/3
1
Fish
Gains From Trade Example
Slavia and Lebos are considering the trade of two goods, clothing and food. Slavia can
produce 10 food or 10 clothing. Lebos can produce 3 Food or 9 Clothing.
•First, Input the data to determine who has a comparative
advantage in production.
Productivity
Food
Slavia
10
Lebos
3
Clothing
10/10 = 1 C
9/3 = 3 C
10
9
10/10 = 1 F
3/9 = 1/3 F
Food
1
Lebos
Slavia
•Indicate Per Unit Opportunity Cost:
1 C
Slavia 1 F costs _______
3 C
Lebos 1 F cost _______
1
1
1C costs _______F
1/3
1C costs _______F
2
3
Clothing
Slavia
•Who has the comparative advantage in the production of food? _________________________________
Lebos
•Who has the comparative advantage in the production of clothing? _________________________________
•
Term of Trade
• If Slavia wants to experience gains from trade then they must agree to trade 1 food for
+1 clothing.
_________
>3
• If Lebos wants to experience gains from trade then they must agree to trade ________ clothing
for 1 food.
Finding the Gains From Trade
1. First, graph original production possibilities
2. Then, graph the new points based on gains trade.
• Slavia and Lebos agree to trade at a rate of 1 food for 2 clothing (1F = 2C).
• Slavia produces all food (10) and trades 1 food for 2 clothing.
• Therefore ending up with 9 food and 2 clothing.
• Lebos produces all clothing (9) and trades 2 clothing to Slavia for 1 food.
• Therefore, Lebos ends up with 7 clothing and 1 food.
Slavia
Food
Production
Possibilities
Before Trade
10
10
9
9
Production
Possibilities
After Trade
8
7
0
Lebos
Food
8
7
6
6
5
5
4
4
3
3
2
2
1
1
1
2
3
4
5
6
7
8
9
Gains from trade
+1 Clothing
1
10
Clothing
0
2
3
4
5
6
7
8
9
Gains from trade
+1/3 Food
10
Clothing
Application Question Comparative Advantage
Economics Papers
Economics Papers
•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
Jane
4
0
Law Papers
6
John
3
0
1
Productivity Per Year
Economics Papers
Jane 4
John 3
6/4 = 1.5 LP
1/3 = .33 LP
Law Papers
6
1
4/6 = 2/3 EP
3/1 = 3 EP
Law Papers
Application Question Comparative Advantage
Economics Papers
Economics 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 respective PPFs.
Jane
4
1
0
Law Papers 5
6
John
3
0
1
Law Papers
*Notice that they have broken through the constraints imposed by the scarcity of time.
Both of these points lie outside the respective PPFs. John could not have written 1 law
paper and 2 economics papers in a year because it takes him a year just to write the law
paper. Jane could never have written 5 law papers and 1 economics papers in one year: it
would have taken her 13 months to do so.*
Sample Free Response Question
1.
2.
•
•
3.
4.
6 points (1 + 2 + 2 + 1)
(a) 1 point:
One point is earned for stating that the opportunity cost of a bicycle in Artland is 600/300 = 2 hats.
(b) 2 points:
One point is earned for stating that Rayland will import bicycles.
One point is earned for any one or more of the following explanations:
•
Rayland has a comparative advantage in hats.
•
Rayland has a comparative disadvantage in bicycles.
•
Rayland has a lower opportunity cost in hats or higher opportunity cost in bicycles.
•
Artland has a comparative advantage in bicycles.
•
Artland has a comparative disadvantage in hats.
•
Artland has a lower opportunity cost in bicycles or a higher opportunity cost in hats.
(c) 2 points:
•
One point is earned for stating that it is advantageous for Artland.
•
One point is earned for stating that it is NOT advantageous for Rayland.
(d) 1 point:
•
One point is earned for stating that Rayland has a comparative advantage in producing hats.
1. The diagram above shows the production possibilities curves for two countries: Artland and Rayland. Using equal
amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce 1,200 hats or 300
bicycles.
•Calculate the opportunity cost of a bicycle in Artland.
•If the two countries specialize and trade, which country will import bicycles? Explain.
•If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following?
1.Artland
2.Rayland
•If productivity in Artland triples, which country has the comparative advantage in the production of hats?
Extra Credit Chapter 3
1. What is the difference
between absolute and
comparative advantage?
2. Give an example of how
in the “real-world”
everyone benefits from
trade
3. Explain your
interpretation of the
political cartoon:
1.
Illustrator’s
message
2.
Clues (people,
symbols etc.)
3.
Do you agree or
disagree?
Review Question Comparative Advantage
Jane
0
Law Papers
Economics Papers
Economics Papers
•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
John
0
Productivity Per Year
Economics Papers
Jane
John
Law Papers
Law Papers
Absolute and Comparative Advantage and Sports
Two athletes Joe and Jim play on the same team football team. Joe is bigger, faster,
and stronger than Jim. The coaches are trying to determine what positions to play
Joe and Jim for the upcoming season. When Joe plays quarterback, he throws 20 td’s
per season. When he plays receiver he scores 12. When Jim plays quarterback he
throws 14 td’s. When he plays receiver he scores 5 td’s. Who should play what?
Plug in the information to the table below.
QB
WR
Joe
20
12
Jim
14
5
QB
WR
Joe
12/20 = ____ 20/12 = ____
Jim
5/14 = _____ 14/5 = _____
Absolute and Comparative Advantage and Sports
Two athletes Joe and Jim play on the same team football team. Joe is bigger, faster,
and stronger than Jim. The coaches are trying to determine what positions to play
Joe and Jim for the upcoming season. When Joe plays quarterback, he throws 20 td’s
per season. When he plays receiver he scores 12. When Jim plays quarterback he
throws 14 td’s. When he plays receiver he scores 5 td’s. Who should play what?
Plug in the information to the table below.
QB
WR
Joe
20
12
Jim
14
5
QB
WR
Joe
12/20
12/20==____
3/5 20/12 = 5/3
____
or 60%
or 1.6%
Jim
5/14 = _____
14/5 = 2.8%
_____
35%
Absolute and Comparative Advantage and Sports
Two athletes Joe and Jim play on the same team football team. Joe is bigger, faster,
and stronger than Jim. The coaches are trying to determine what positions to play
Joe and Jim for the upcoming season. When Joe plays quarterback, he throws 20 td’s
per season. When he plays receiver he scores 12. When Jim plays quarterback he
throws 14 td’s. When he plays receiver he scores 5 td’s. Who should play what?
Plug in the information to the table below.
QB
WR
Joe
20
12
Jim
14
5
QB
WR
Joe
12/20
12/20==____
3/5 20/12
20/10 = 5/3
____
or 60%
or 1.6%
Jim
5/14 = _____
14/5 = 2.8%
_____
35%
Trade Barriers and Agreements
Trade Barrier – a trade restriction, used to prevent a foreign product
from freely entering a nation’s territory
Import Quotas – a limit on the amount of a good that can be
imported
Voluntary Export Restraint – a self-imposed limitiation on the a
number of products shipped to a particular country
Tariffs – a tax on imported goods
International Cooperation and Agreements
International Free Trade Agreement – results from cooperation between
countries to reduce trade barriers and tariffs to promote trade
North American Free Trade Agreement (NAFTA) – agreement between
Canada, Mexico and the U.S. to eliminate tariffs and other trade barriers
European Union (EU) – a regional trade organization of European nations
World Trade Organization (WTO) – a worldwide organization whose goal is to
promote free global trade
Measuring Trade
Exchange Rate – the value of one foreign nation’s currency in
relation to another nation’s currency
Determining the Rate of Exchange
1 Dollar = 12 Mexican Pesos
Hotel room costs 500 Pesos per night
500/12 = $41.66
Due Monday 1-23
1. Comparative Advantage Article
(Lance Armstrong, Martha Stewart)
2. Absolute and Comparative Practice
3. Homework - The Legacy of Adam
Smith and David Ricardo, pg. 57
4. Homework - YouTube Video #34:
Compartive Advantage and Trade
5. Homework - Should Tiger Woods
Mow His Own Lawn, pg. 58
6. Homework - The Changing Face of
International Trade, pg. 59
7. Chapter 3 Practice Review
8. Free Response Questions
9. Daily Tens (3)
10. Notes Chapter 3
11. Terms Chapter 3
Specialization and Trade
Carl
Kate
Specialization
Trade
Net Effect
Specialization
Trade
Net Effect
Carl
Specializes,
switching 2
hours from tshirt
production to
birdhouse
production
Carl trades 1
birdhouse for 2
t-shirts
Net effect is
same number
of t-shirts and
1 more
birdhouse
Kate
specializes,
switching one
half-hour
from
birdhouse
production to
t-shirt
produciton
Kate trades 2 tshirts for 1
birdhouse
Net effect
is the
same
number of
birdhouse
s and 1
more tshirt
1.
a. Angela’s PPF
b. 2 mugs. 20 mugs.
c. 1/2 pot. 5 pots
d. Because Angela’s
productivity in pot and mug
production is constant – it
doesn’t depend on how
many mugs or pots she is
making. Therefore the
opportunity cost of mugs in
terms of pots is constant
(and, of course, so is the
opportunity cost of pots in
terms of mugs).
1/3 ton of grain. 3
computers.
d. 1 ton of grain. 1
computer.
e. Germany because one
worker can produce
15 computers
compared to 4.
Germany because one
worker can produce 5
tons of grain
compared to 4.
c.
f.
g.
h.
Germany because a computer
has the opportunity cost of
only 1/3 ton of grain
compared to 1 ton of grain in
Poland. Poland because a ton
of grain has the opportunity
cost of only 1 computer
compared to 3 computers in
Germany.
Germany should produce
computers while Poland
should produce grain because
the opportunity cost of
computers is lower in
Germany and the opportunity
cost of grain is lower in Poland.
That is, each has a
comparative advantage in
those goods.
Grain must cost less than 3
computers per ton to
Germany. Computers must
cost less than 1 ton of grain
per computer to Poland.
b. United States
c. Neither, the opportunity cost is the same
d. No. Each can get the same trade-off between
goods domestically.
Application Questions – pgs. 58 – 59
1.
2.
3.
4.
1.
2.
3.
Should Tiger Woods Mow His Own Lawn?
What does Tiger Woods hold an absolute advantage in?
What does Forrest Gump have a comparative
advantage in?
What is the opportunity cost for both Tiger and Forrest
for mowing the lawn?
Why are the gains from trade beneficial in this
scenario?
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.
What is the opportunity cost for both countries
production of cars and food?
Who has a comparative advantage in the production of
each?
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?
ShouldProductivity
The UnitedPer
States
Trade With Other Countries?
Month
1. Define imports and exports.
2. Create
a chart to show the production
of cars and food
Food
Cars
in the U.S. and Japan.
3. U.S.
What is the
2 opportunity
1/2 = ½ cost for both
1 countries
2/1 = 2
production of cars and food?
4. Japan
Who has a comparative advantage in the production of
1 1/1 = 1
1 1/1 = 1
each?
Answer the question to the “Quick Quiz”
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?
ShouldProductivity
The UnitedPer
States
Trade With Other Countries?
Month
1. Define imports and exports.
2. Create
a chart to show the production
of cars and food
Food
Cars
in the U.S. and Japan.
3. U.S.
What is the
2 opportunity
1/2 = ½ cost for both
1 countries
2/1 = 2
production of cars and food?
4. Japan
Who has a comparative advantage in the production of
1 1/1 = 1
1 1/1 = 1
each?
Application Question Comparative Advantage
•A Japanese worker can produce 6 units of steel or 3 televisions. A South Korean
worker can produce 8 units of steel or 2 televisions.
Output
Japan
Steel
Televisions
6
3
S. Korea 8
3/6 = 1/2 TV
2/8 = 1/4 TV
2
6/3 = 2 STL
8/2 = 4 STL
TVs
Japan
1 Steel = 1/2 TV
1 TV = 2 Steel
S. Korea
1 Steel = 1/4 TV
1 TV = 4 Steel
Terms of Trade
1TV = 3 Steel
1 Steel = 1/3 TV
1
Japan
1
S. Korea
2
3
4
5
Steel
Suppose that Japan and South Korea settle on a trading price of 1 television
for 3 units of steel (or 1/3 of a television for 1 unit of steel).
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.
Steel
12
11
10
9
8
7
6
5
4
3
2
1
0
South Korea
Steel
Japan
Gains from trade
+1/2 TV
Televisions
1 23 45 678
Productivity
ProductivityPer Hour
Steel
Steel
Japan
6
SKorea
S.
Korea 8
3/6 = 1/2 TV
2/8 = 1/4 TV
Televisions
Televisions
3
2
6/3 = 2 STL
8/2 = 4 STL
12
11
10
9
8
7
6
5
4
3
2
1
0
Gains from trade
+1/4 Steel
1 23 45 678
Televisions
*Important Point: The production
possibilities frontier is linear in these
cases because the labor resource can
be moved from the production of one
good to the other at a constant rate.*
1. Anna and Barry can grow the following amounts of potatoes and cabbage with the same amount
of labor. Type of problem: (output / input)
2
Anna – 1 Potatoe = ______
Cabbage
1.25 Cabbage
Barry – 1 Potatoe = ______
1/2 Potatoe
Anna – 1 Cabbage = ______
.80
Barry – 1 Cabbage = _______
Potatoe
2. Number caught per day. Type of problem: (output / input
1.5 Antelope
Henry – 1 Deer = ______
.5 Antelope
John – 1 Deer = ______
2/3 Deer
Henry – 1 Antelope = ______
2 Deer
John – 1 Antelope = ______
3. Days to produce one unit of each. Type of problem: (output / input)
XYZ Corp – 1 Car = ______ Plane
QKFX – 1 Car = ______ Plane
XYZ Corp – 1 Plane = ______ Cars
QKFX – 1 Plane = ______ Cars
4. Acres to produce 100 bushels. Type of problem: (output / input)
India – 1 Corn = ______ Rice
China – 1 Corn = ______ Rice
India – 1 Rice = ______ Corn
China – 1 Rice = ______ Corn
5. To produce the following from one ton of olives. Type of problem: (output / input)
Zaire – 1 Olive = ______ Bottles
Colombia –1 Olive = ______ Bottles
Zaire – 1 Bottle = ______ Olives
Colombia – 1 Bottle = ______ Olives
Extra Credit
“Tiger Woods should not mow
his own lawn.” Use the
concepts of specialization and
comparative advantage to
argue for this statement.
Draw a personal PPF model.
Draw a personal circular flow
model and a detailed
explanation for each part of the
model.
Due Today – Binder Check
Chapter 2 +3
1. Chapter 2 +3 Notes
2. PPF Activity Reflection Questions
and Graph
3. Absolute and Comparative Practice
4. Free Response Questions
5. Daily Tens
6. PPF Exercise Worksheet