Shortly after you learn about opportunity costs and
PPFs, you will need to learn about gains from trade and comparative advantage.
The trick to figuring out who has the comparative advantage in which good is to
be able to calculate opportunity costs quickly and reliably. You will probably
be given a table that shows the different possible levels of output a certain
individual is able to produce (of two goods or services). You can use this
information to calculate the tradeoffs (or opportunity costs) associated with
the different possible levels of production. Once you have the opportunity cost
calculated, you can compare that result to the opportunity cost the other
country or individual has for the good to see which opportunity cost is lower.
The individual or country with the lowest opportunity has the comparative
advantage. Below, I go through two examples, one with individuals and another
with countries.
Showing posts with label absolute advantage. Show all posts
Showing posts with label absolute advantage. Show all posts
6/22/18
9/8/11
If two countries specialize, how many additional units of a good can be produced?
Jeff
14:43
This post will go over a common question asked in economics about the time you are going over PPFs, comparative and absolute advantage and gains from trade. They typically give you information in the following format:
Canada | Mexico | ||
Bacon (in tons) | Tacos (in tons) | Bacon (in tons) | Tacos (in tons) |
0 | 135 | 0 | 75 |
50 | 90 | 5 | 50 |
100 | 45 | 10 | 25 |
150 | 0 | 15 | 0 |
This table gives you information about two countries, and shows you the information that would be required to construct a production possibility frontier (PPF). The first question is using asking about which country has the comparative and absolute advantage in each good. For the above example,
9/5/11
PPF, opportunity cost and trade with a gains from trade example, a summary
Jeff
18:38
1) PPF’s:
Production possibility frontier, a graph that shows the combinations of goods and services that can be produced if all of society’s resources are used efficiently.
Example given a table:
Jimmy
| |
Food
|
Wood
|
50
|
0
|
40
|
20
|
30
|
40
|
20
|
60
|
10
|
80
|
0
|
100
|
We are given data on what Jimmy can and cannot produce. We see a tradeoff between producing food or wood, as Jimmy produces more wood, he has to produce less food. We can also that the opportunity cost of producing 20 more wood is 10 food, so the opportunity cost of 1 wood is .5 food. An easy way to remember how to calculate opportunity costs is to take the marginal change from one point to the next, and set them up in the following equation:
5/23/11
The Difference between Comparative and Absolute Advantage
Jeff
12:45
The is a common problem when trying to learn introductory microeconomics. Comparative and Absolute advantage generally comes into play when looking at to different countries (who are considering trading) or two different people.
Lets set up an example. We have two people, Joe and Elaine, and they can each gather grapes or water. Joe can gather 8 grapes per hour, or get 4 gallons of water. Elaine can gather 10 grapes per hour, or get 10 gallons of water.
The easiest concept to look at first is absolute advantage. Absolute advantage means that a person or country can produce more in a given time frame than someone or something else. Because Elaine can gather more grapes (in a specific time frame) than Joe, she has the absolute advantage in grapes. Also, Elaine can get more water in an hour than Joe, so she also has the absolute advantage in water. Elaine has the absolute advantage in both grapes and water, because she can produce/gather more of each per hour than Joe can.
Now, lets consider comparative advantage.
Lets set up an example. We have two people, Joe and Elaine, and they can each gather grapes or water. Joe can gather 8 grapes per hour, or get 4 gallons of water. Elaine can gather 10 grapes per hour, or get 10 gallons of water.
The easiest concept to look at first is absolute advantage. Absolute advantage means that a person or country can produce more in a given time frame than someone or something else. Because Elaine can gather more grapes (in a specific time frame) than Joe, she has the absolute advantage in grapes. Also, Elaine can get more water in an hour than Joe, so she also has the absolute advantage in water. Elaine has the absolute advantage in both grapes and water, because she can produce/gather more of each per hour than Joe can.
Now, lets consider comparative advantage.
