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Unit 1:�Basic Economic Concepts

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Copyright

ACDC Leadership 2019

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Topic 1.4-

Comparative Advantage and Gains from Trade

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Why do people trade?

  1. Assume people didn’t trade. What things would you have to go without?

Everything you don’t produce yourself!

(Clothes, car, cell phone, bananas, healthcare, etc.)

The Point: Everyone specializes in the production of some goods and services and trades for others.

  1. What would life be like if people in cities couldn’t trade with people in other cities or people in states couldn’t trade with people in other states?

Limiting trade would reduce people’s choices and make people worse off.

The Point: More access to trade means more choices and a higher standard of living.

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Absolute and Comparative Advantage

Absolute Advantage

    • The producer that can produce the most output OR requires the least amount of inputs (resources).
    • Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.

Comparative Advantage

    • The producer with the lowest opportunity cost.
    • Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost.

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Countries should trade if they have a relatively lower opportunity cost.

They should specialize in the good that is “cheaper” for them to produce (the one they have a comparative adv)

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Output Questions:

OOO=

Output: Other goes Over

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Input Questions

(The variable is resources or time)

IOU=

Input: Other goes Under

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Terms of Trade

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Both countries can benefit from trade if they each have relatively lower opportunity costs.

Terms of Trade- The agreed upon conditions that would benefit both countries.

Ex: Trade 1 ton of wheat for 1.5 tons of sugar

Acceptable terms of trade always lie between the opportunity costs!

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2008 Audit Exam

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2008 Audit Exam

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2008 Audit Exam

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2008 Audit Exam

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2008 Audit Exam

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2008 Audit Exam

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2012 Audit Exam

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2012 Audit Exam

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2012 Audit Exam

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2012 Audit Exam

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2008 Audit Exam

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Video Practice

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Comparative Advantage Practice

Create a chart for each of the following problems.

      • First- Identify if it is a output or input question
      • Second-Identify who has the ABSOLUTE ADVANTAGE
      • Third-Identify who has a COMPARATIVE ADVANTAGE
      • Fourth- Identify how they should specialize

1. Sara gives 2 haircuts or 1 perm and hour. Megan gives 3 haircuts or 2 perms per hour.

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2. Justin fixes 4 flats or 8 brakes per day. Tim fixes 1 flats or 5 brakes per day.

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3. Hannah takes 30 minutes to wash dishes and 1 hour to vacuum the house. Kevin takes 15 minutes to wash dishes and 45 minutes to vacuum.

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4. Americans produce 50 computers or 50 TVs per hour. Chinese produce 30 computers or 40 TVs per hour.

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Input or Output Question?

Number caught per day

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Deer

Antelope

Henry

4

6

John

24

12

Months to produce one

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Car

Plane

Canada

8

10

Japan

15

12

Acres to produce 100 bushels

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Corn

Rice

Henry

9

3

John

8

2

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Absolute Advantage?

Number caught per day

​

Deer

Antelope

Henry

4

6

John

24

12

Months to produce one

​

Car

Plane

Canada

8

10

Japan

15

12

Acres to produce 100 bushels

​

Corn

Rice

Henry

9

3

John

8

2

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Comparative Advantage?

Number caught per day

​

Deer

Antelope

Henry

4

6

John

24

12

Months to produce one

​

Car

Plane

Canada

8

10

Japan

15

12

Acres to produce 100 bushels

​

Corn

Rice

Henry

9

3

John

8

2

OOO

IOU

IOU

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Comparative Advantage?

Number caught per day

​

Deer

Antelope

Henry

4 (1D=3/2A)

6 (1A =2/3D

John

24 (1D=1/2A)

12(1A=2D)

Months to produce one

​

Car

Plane

Canada

8

10

Japan

15

12

Acres to produce 100 bushels

​

Corn

Rice

Henry

9

3

John

8

2

OOO

IOU

IOU

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Comparative Advantage?

Number caught per day

​

Deer

Antelope

Henry

4 (1D=3/2A)

6 (1A=2/3D)

John

24 (1D=1/2A)

12 (1A=2D)

Months to produce one

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Car

Plane

Canada

8 (1C=4/5P)

10 (1P=5/4C)

Japan

15(1C=5/4P)

12 (P=4/5C)

Acres to produce 100 bushels

​

Corn

Rice

Henry

9

3

John

8

2

IOU

OOO

IOU

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Comparative Advantage?

Number caught per day

​

Deer

Antelope

Henry

4 (1D=3/2A)

6

John

24 (1D=1/2A)

12

Months to produce one

​

Car

Plane

Canada

8 (1C=4/5P)

10 (1P=5/4C)

Japan

15(1C=5/4P)

12 (1P=4/5C)

Acres to produce 100 bushels

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Corn

Rice

Henry

9 (1C=3R)

3 (1R=1/3C)

John

8 (1C=4R)

2 (1R=1/4C)

OOO

IOU

IOU

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ACDC Leadership 2019