Farmland and Techland

Who Has the Absolute Advantage?

• In Bread? Farmland (100 > 90)
• In Smartphones? Techland (120 > 50)

• Should they trade?

Comparative Advantage

A country has a comparative advantage if it can produce a good with a lower opportunity cost.

• It’s not about being the best, it’s about losing the least.

Calculate Opportunity Cost

We need to find the opportunity cost of producing 1 unit of each good.

Opportunity Cost = (What you Lose) / (What you Gain)

Farmland Opportunity Cost

It can make 100 Bread or 50 Smartphones.

To produce 1 Bread, Farmland gives up:

OC of 1 Bread = 50 Smartphones / 100 Bread = 0.5 Phones

To produce 1 Phone, Farmland gives up:

OC of 1 Phone = 100 Bread / 50 Smartphones = 2 Bread

Group Work: Calculate for Techland

• What is the OC of 1 Bread?
• What is the OC of 1 Smartphone?

Now Compare Opportunity Costs

• Who has the lower OC for Bread? Farmland (0.5 < 1.33)
• Who has the lower OC for Phones? Techland (0.75 < 2.0)

Who has the comparative advantage?

• Farmland has a Comparative Advantage in Bread. It gives up fewer phones to make bread.
• Techland has a Comparative Advantage in Smartphones. It gives up less bread to make phones.

Vocabulary

Specialize, specialization (专业化)

Focus on producing something to produce more efficiently.

Why Trade

Countries should specialize in the good for which they have a comparative advantage and then trade.

Without specialization

If they try to do Bread and Phones equally:

• Farmland: 50 Bread, 25 Phones
• Techland: 45 Bread, 60 Phones
• World Total: 95 Bread, 85 Phones

With Specialization

• Farmland ( specializes in Bread): Produces 100 Bread, 0 Phones
• Techland ( specializes in Phones): Produces 0 Bread, 120 Phones
• World Total: 100 Bread (+5), 120 Phones (+35)

Now they can trade.

They can now trade so both have more of both goods than they started with!

e.g., Farmland trades 40 Bread to Techland for 40 Phones.

• Farmland ends with: 60 Bread, 40 Phones (More of both!)
• Techland ends with: 40 Bread, 80 Phones (More of both!)

Takeaway: Why Trade?

1. Absolute advantage: Can I produce more than you (Not a good reason to trade)
2. Comparative advantage: Is my opportunity cost lower than yours? (Yes? Good reason to trade.)
3. Everyone benefits by specializing in what they are best at producing.

Group Work:

Colombia can produce 60 tons of Coffee OR 30 tons of Coconuts. Bolivia can produce 20 tons of Coffee OR 20 tons of Coconuts.

1. Who has an absolute advantage in Coffee? In Coconuts?
2. Calculate the opportunity cost for Coffee and Coconuts in each country.
3. Who has a comparative advantage in each good?
4. Should they trade? Why or why not?