Comparative Advantage

1
Comparative Advantage

• Some Examples

2
Understanding Comparative Advantage

• Example you go to law school learn the law and
  graduate
• During school you gained 2 important skills
• Type papers accurately and quickly
• Effectively analyze legal issues
• You start your own law firm.
• Hire legal secretary
• Your hourly fee 200
• Legal Secretarys Wage 25
• Typed Documents
• You50 pages per hour
• Secretary25 pages per hour

3
Understanding Comparative Advantage

• Analyze this Situation
• What are your possible activities?
• Work on legal issues
• Type documents
• What should you do?

4
Opportunity Costs

• Whats the opportunity cost when you prepare a 50
  page document?
• This takes you 1 hour.
• What else could you do in this hour?
• Whats the opportunity cost when your secretary
  prepares the same 50 page document?
• This takes this person 2 hours.
• What else could your secretary do in this hour?

5
Another Example

• Two Countries
• US
• Canada
• Two possible outputs
• Maple Syrup
• Wheat

6
Comparative Advantage and Trade
7
Current Situation

• No Interaction/No Trade Initial Outputs
• Canada10 Maple Syrup 45 Wheat
• US18 Maple Syrup 30 Wheat
• Draw PPFs for each Country

8
PPFs For US and Canada
PPF for Canada
PPF for US
9
Initial Situation No Trade
Output in Canada
Output in US
10
Analyzing the situation

• Find Absolute Advantage
• Determine Opportunity Costs for each Country
• Who has lower opportunity costs for each good
• Determine Comparative Advantage from opportunity
  costs
• Consider what happens when they trade
• Consider what happens if they specialize

11
When Trade Begins
Original Output and Consumption in Canada
New Consumption in CanadaAfter Trade
New Consumption in USAfter Trade
Original Output and Consumption in US
12
Specialization
Total Output with Specialization
CanadaSpecializes in Wheat USSpecializes in
Maple Syrup
13
Results

• Who is better off?
• As a result of trade?
• As a result of specialization?
• What do actually observe in the world
• Most countries produce many goods
• Where is the comparative advantage?
• How do government policies affect this?