Absolute vs' Comparative Advantage

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Absolute vs. Comparative Advantage

• Comparative advantage Ability to produce a good
  or service at a lower opportunity cost
• Absolute advantage Ability to produce a good or
  service using fewer resources
• Note Absolute advantage does not necessarily
  imply comparative advantage
• Gains from trade require specialization according
  to comparative advantage, not according to
  absolute advantage

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Demonstrate Gains from Trade Using Hypothetical
Case of U.S. and Japan Cars and Planes

• In Class Workout

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Individual Countries
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Joint Production
Gains from Trade
(24, 8)
(18, 6)
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Individual Countries
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Joint Production
(8, 24)
Gains from Trade
(10, 14)
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Individual Countries
8
Joint Production
(9, 18)
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Basic Terms of Trade Statistics

• Exports Sales of Goods and Services to other
  countries
• Imports Purchases of Goods and Services from
  other countries
• Balance of Trade Exports - Imports

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TRADE IS GETTING MORE IMPORTANT
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Just-in-time lobsters
Mike Middleton Louisville, Kentucky
The Economist Jun 15th 2006
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6 of the Iowa Economy
http//www.census.gov/foreign-trade/statistics/
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