Comparative advantage

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Intros
Lessons
  1. Comparative Advantage Overview:
  2. Types of Advantages
    • Comparative advantage
    • Absolute advantage
  3. Solving Comparative Advantage Problems
    • Set up a table
    • Compute opportunity costs
    • Circle the lowest opportunity costs
    • Define who should produce what
    • An Example
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Examples
Lessons
  1. Solving Comparative Advantage and Absolute Advantage Problems
    In an hour, Bella can produce 30 drawings or 5 books and Billy can produce 2 drawings or 20 books.
    1. Calculate Bella's opportunity cost of producing a drawing and a book?
    2. Calculate Billy's opportunity cost of producing a drawing and a book?
    3. Who has the comparative advantage in drawings and in books? What should Billy and Bella specialize in?
  2. In an hour, Kevin can produce 2 computers and 5 laptops and Luke can produce 2 computers and 10 laptops
    1. Calculate Kevin's opportunity cost of producing a laptop?
    2. Calculate Luke's opportunity cost of producing a laptop?
    3. Who has the comparative advantage in producing laptops?
    4. If Kevin and Luke specialize in producing goods in which each of them has a comparative advantage in, and they trade 1 computer and 3 laptops, who gains from the specialization and trade?
  3. Suppose Kevin buys a new machine that lets him create 10 computers an hour. Who has the comparative advantage in making computers?
    Topic Notes
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    Types of Advantages


    Comparative advantage: Able to produce the product at a lower opportunity cost than anyone else.


    Absolute advantage: produce the product using fewer inputs than everyone else.


    Comparative advantage vs Absolute advantage: Comparative advantage involves comparing opportunity costs, while absolute advantage compares with production per hour.


    Note: If two people or societies specialize in producing products in which they have comparative advantages, then the total value of goods and services will increase. This makes things more efficient.


    Solving Comparative Advantage Problems


    Follow the 4 steps::
    1. Set up a table to put all the values
    2. Compute opportunity costs
    3. Circle the lowest opportunity cost in each activity
    4. Define who should produce what