comparative advantage and trade why do economies trade?

Comparative Advantage and Trade

Why do economies trade?

Graph the Following PPC

Packs of Gum Chocolate Bars0 125 8

10 415 0

Answer the Following:

1. What is the slope of the curve?

2. What is the opportunity cost of producing a pack of gum?

3. What is the opportunity cost of producing a chocolate bar?

4. Calculate the area under the curve.

Packs of Gum

ChocolateBars

0

12

15

Production Possibilities Curve

PPC

Answer the Following:

1. What is the slope of the curve?

2. What is the opportunity cost of producing a pack of gum?

3. What is the opportunity cost of producing a chocolate bar?

4. Calculate the area under the curve.

-4/5

-4/5 of a chocolate bar

-1.25 packs of gum

90 units

Plot the following PPC on the same graph

Packs of Gum Chocolate Bars0 102 54 0

Packs of Gum

ChocolateBars

0

12

15

Production Possibilities Curve

PPCA

10

4

PPCB

Who has absolute advantage?

Country Gum ChocolateA 15 12B 4 10

Which country can make more?

Country A has absolute advantage in both gum and chocolate

Who has comparative advantage?

Country Gum ChocolateA -4/5 chocolate -5/4 gumB - 5/2 chocolate -2/5 gum

How do the opportunity costs compare for both countries?

Country A has comparative advantage in gumCountry B has comparative advantage in chocolate

Work Together…

State Apples TimberOregon 10 40

Washington 40 10

1. Draw the PPCs for both states2. Who has absolute advantage?3. Who has comparative advantage?4. What happens to production and consumption

when Oregon and Washington trade 20 apples for 20 timber?

Values represent all resources spent on one good(the other value is 0)