Module 1 - Case
May 14 2013
Today we will be looking at the concepts of Absolute and Comparative Advantages. I will define them both in my own words, and give you an example to better explain what they mean. We will then talk about the effects trade has on production possibilities, and we will go over a couple different factors that expand the production possibilities. We will look at free trade, what exactly that is as compared to what we currently have now. Lastly, I will give you my own thoughts, with supporting material, on global trade. First we are going to look at Comparative and Absolute advantages. So what do these two terms mean? Comparative advantage is the ability to make or produce something at a lower opportunity cost. Opportunity cost is something we do every single day of our lives. This is you giving up something for something else. Let us say you wanted some new shoes. Those shoes cost $80 and you only make $40 a week. You would have to give up spending any of your money for two weeks to buy your new shoes. So you gave up junk food or a movie night for your new shoes. Absolute Advantage is something you can make or produce more efficiently than your competitors. For instance I am really good at landscaping and fairly good at flying on special aircraft. My neighbor is ok at landscaping but cannot fly due to severe air sickness. I have to choose one job over the other. I could make a living as a landscaper, however I could make a good living flying on aircraft. So I have an absolute advantage over my neighbor because he can’t fly. My neighbor has a comparative advantage over me because he can also landscape, but he can’t fly so he has less to loses/give up to be a landscaper. I would be a better landscaper but would lose money if I did that instead of flying. There is a simple formula for this and it would be: Job A, the lower paying job, minus Job B, the higher paying job, equals the annual lose, for picking Job A. Now swap that around Job B make more money job minus Job A I would come out with a positive number which in return would be the one to pick.
This takes me right into the USA and Canada potatoes and rice scenario. First thing one has to do is write out the information to fully understand what’s going on. The USA can produce 8 potatoes and 4 rice, but it can only do one or the other or half of both. So the US can produce 8 potatoes or 4 rice or 4 potatoes and 2 rice. Canada has an absolute advantage because it can produce more of items, 16 rice or 10 potatoes or 8 rice and 5 potatoes. The comparative advantage that works well for both countries would be the USA produce the potatoes and Canada produce the rice for a combined total of 24 units! The USA could have produced both for a total of 6 and Canada could have done the same for a total of 13. When we combine the two countries totals we get a total of 18. When the USA and Canada work together they produce more, USA 8 plus Canada's 16 for a total of 24. So from an economic standpoint the two countries both gain in working together. This is the basis of globalization from a small scale scenario. Every country in the world has something to gain from another whether it be from beans or TV's to gardening tools. We will now look into production possibilities and trade. First off we will look at free trade and its basic concept. Free trade is just that a mutual understanding of a one for one swap of goods. This doesn’t half to be one for one but to simplify the understanding I will use one for one. With this understanding the two countries don’t charge any kind of taxes for import or export. This lack of taxes is what helps the whole thing work out more easily. With these two countries swapping goods on a one for one base this allows both of them to fully take advantage of one another’s comparative advantage. Maybe it is easier for one to produce bananas and the…