Comparative Advantage Example for Macro

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Comparative Advantage Example for Macro


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PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 20 20 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 20 20

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 20 2 0 10C = 30W 1C = 3W

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 20 2 0 10C = 30W 1C = 3W 1 27

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 2 0 10C = 30W 1C = 3W 1 27 2 24 5 15

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 2 0 10C = 30W 1C = 3W 30W = 10C 1W = .33C 9.67 1

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 20 10C = 30W 1C = 3W 30W = 10C 1W = .33C 9.67 1 9.33 2

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 20 10C = 30W 1C = 3W 30W = 10C 1W = .33C 9.67 1 9.33 2 5 15

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 2 0 10C = 30W 1C = 3W 30W = 10C 1W = .33C 2 0C = 20W 1C = 1W 5 15

PowerPoint Presentation : Country “A” Country “B” Corn Corn Wheat Wheat 10 30 2 0 2 0 5 15 1 0 1 0 Country “A” “B” Corn Opp Cost Wheat Opp Cost 10 30 2 0 2 0 10C = 30W 1C = 3W 30W = 10C 1W = .33C 2 0C = 20W 1C = 1W 2 0W = 20C 1W = 1C

PowerPoint Presentation : Who has the Comparative Advantage in Corn? This country will SPECIALIZE in this Good. Who has the Comparative Advantage in Wheat? This country will SPECIALIZE in this Good.

PowerPoint Presentation : Now we want to compare each countries Opportunity Cost of Producing EACH Good to determine: Which Country produces the Good at the LOWEST OPPORTUNITY COST. Rule of Thumb: Look at each ratio and compare ACROSS the “Border”. Look at the numbers on the RIGHT SIDE of the “=“ sign. Circle the ratio that has the SMALLER number on the Right Side. ** THIS COUNTRY WILL HAVE THE LOWEST OPPORTUNITY COST in producing this good, hence the “Comparative Advantage”.

PowerPoint Presentation : For all this to work and for trade to be “Mutually Advantageous”---there h as to be some “Acceptable Term(s) of Trade” established. In other words, The Price has to be Right to trade Wheat for Corn, Corn for Wheat

PowerPoint Presentation : Now the Fun Part!---Acceptable Terms of Trade. 1. Look at each Category of Good and the Opp. Cost Ratios 2. Use the one that has the most “round whole numbers” if possible 3. Pick a Ratio of “Corn to Wheat” OR “Wheat to Corn” that is IN BETWEEN the Opportunity Cost pair you choose. I would use “1C = 2W” as my Term of Trade

PowerPoint Presentation : Terms of Trade: 1C = 2W OR 1W = .50C “A” Produces all Wheat but wants to still consume 15 bushels Of Wheat. It can trade its surplus 15 bushels to “B” and get .50 bushels Of Corn for each of the bushels of Wheat. So it can buy 7.5 bushels of Corn From “B”. 7.5 7.5

PowerPoint Presentation : Terms of Trade: 1C = 2W OR 1W = .50C “B” Produces all Corn but wants to still consume AT least 10 bushels Of Corn. It can trade its surplus bushels to “A” and get 2 bushels Of Wheat for each of the bushels of Corn. So it can buy all 15 bushels of Wheat from “A” for 7.5 Corns and have a 15 bushels of Wheat to consume PLUS and an additional 2.5 bushels of Corn (did not have to give up the whole 10) . 7.5 35 32.5 15 12.5 15

PowerPoint Presentation : Terms of Trade: 1C = 2W OR 1W = .50C IMPORTANT NOTE: If the Terms of Trade FALL OUTSIDE of the Opportunity Costs on either extreme, then one Country will find the Terms NOT ACCEPTABLE t herefore not find trade advantageous . 7.5 30

PowerPoint Presentation : Terms of Trade: 1C = 3W OR 1W = .33C “B” would trade only 5 Corns and get 15 Wheats PLUS have 15 Corns still---NICE for them! “A” would trade 15 Wheats and get 5 Corns (15W X .33C) They would not improve any (still on their own PPF) They would not find trade advantageous! 30 60

PowerPoint Presentation : Terms of Trade: 1C = 1W OR 1W = 1C “A” would trade 15 Wheat and get 15 Corns---NICE for them! “B” would trade 15 Wheats and get 15 Corns They would be worse off!! They would not find trade advantageous! 30 15

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