Comparative Advantage1.pptxVIP

Chapter 2 Comparative Advantage Absolute Advantage One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person. You and I are now working on two assignments of Accounting and Economics. The no. of hours needed to finished the assignment individually are shown in the table below. Who has Absolute Advantage in completing the Accounting assignment? Who has Absolute Advantage in completing the Economics assignment? To save the time, I should work on the Economics assignment and you should work on the Accounting assignments. Accounting Economics You 5 6 I 8 2 Absolute Advantage Who has Absolute Advantage in completing the Accounting assignment? Who has Absolute Advantage in completing the Economics assignment? Should you work on both assignments? NO! Scarcity!! Opportunity Cost!!! Accounting Economics You 5 1 I 8 2 Comparative Advantage One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost. Who has Comparative Advantage in completing the Accounting assignment? Your OC: 1 AA = 5 EA My OC: 1 AA = 4 EA Who has Comparative Advantage in completing the Economics assignment? Your OC : 1 EA = 1/5 AA My OC : 1 EA = ? AA Accounting Economics You 5 1 I 8 2 Comparative Advantage The Principle of Comparative Advantage Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest. If 50 units of iPhone are needed by the market, and the US devotes 6 working days on producing iPhone and 4 days on HiPhone respectively, what are the total outputs produced in 10 days? iPhone HiPhone US 5 units per day 10 units per day China 2 units per day 6 units per day iPhone HiPhone US 30 40 China 20 0 Comparative Advantage Cost of producing iPhone US: 1 iPhone = 2 HiPhone China: 1 iPhone = 3 HiPhone US has comparative advantage in producing iPhone. US should specialize in