2.01 Comparative Advantages - robertbove

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A Rice Culture
 Rice grown in Japan
 Grown on small farms
 Japanese consumers pay up to 7x more than
US consumers
 Multiple uses of rice (clothing, mats, &
household items)
 Japanese government subsidies
 Powerful farmers’ lobby
 700% tariff on imported rice
Economic theories
 Absolute advantage - a country can produce more units
of a product at a lower cost using fewer resources than
other countries
 Ex) US - absolute advantage over Japan in rice & cotton
production, can produce at lower price per unit than Japan
 Ex) US - absolute advantage over France in cheese production;
can produce at lower price per unit than France
 Ex) Canada - absolute advantage with lumber production; can
produce at lower price than other countries
 Ex) China - absolute advantage over the US in toy production;
can produce at lower price than US
Economic theories (con’t)
 Comparative advantage - a country should specialize in the
production of a product that it can produce relatively better, or
more efficiently than other countries
 More efficiently includes being able to produce product with lower
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opportunity cost
Ex) Japan – comparative advantage over US producing rice, can
produce more efficiently with lower opportunity cost than US
Ex) US - comparative advantage over Japan producing cotton, can
produce more efficiently with lower opportunity cost than Japan
Ex) Brazil - comparative advantage over US producing coffee; can
produce more efficiently with lower opportunity cost than US
http://www.youtube.com/watch?v=Pd_qs8ueIWw
http://www.youtube.com/watch?v=Vvfzaq72wd0
Two you-tube videos on absolute & comparative advantages
Economic theories (con’t)
 Production possibility curve - a hypothetical representation
that shows tradeoff in production shifting resources between 2
products
•Producing more of 1
product reduces
production on other
•Tradeoff slope
represents opportunity
cost
•http://www.youtube.com/watch?v=uW
wrb--yk-w&feature=related
•Production possibility curve video
Economic theories (con’t)
 Opportunity cost - value of what is given up in
producing 1 product when another is produced
 Ex) Japan - more efficient producing rice than cotton;
focuses more resources on rice
 Ex) US - more efficient at producing cotton than rice;
focuses more resources on cotton
 http://www.investopedia.com/video/play/opportunity-cost/
 Opportunity cost video
Economic theories (con’t)
 Commodity - raw material or agricultural product that
may be same regardless of who produces it
 Ex) Oil from Saudi Arabia - just as valuable as oil from
Venezuela
 Ex) Rice from US, Japan or Thailand – viewed same by most
western consumers
Global factors of production
A country’s comparative advantage comes from its
global factors of production. The US has available
resources in all factors of production
1. Natural resources - includes land, forests, minerals, oil, &
bodies of water
 Many African countries rich in gold, diamonds & other
minerals
 Saudi Arabia, Libya, Iraq & Venezuela - rich in oil.
 US rich in farmland, fresh water &natural gas.
Global factors of production
2. Human resources - (or labor) includes workers,
management & entrepreneurs
 Developed countries such as Japan, Germany, UK & US
rich in skilled labor & management expertise
 China rich in low-cost labor
Global factors of production
3. Capital resources - (or man-made items) includes
buildings, machinery & funds
 Developed countries such as Japan, Germany, UK & US
rich in capital; funds to invest in infrastructure, business
ventures.
 Underdeveloped countries such as Guatemala, Liberia &
Nepal lack capital to invest in infrastructure & business
ventures
Comparative advantage of nations
 Country’s industries develop through strong internal
competition
 Ex) Coke vs. Pepsi; AT&T vs. Verizon
 Japanese companies - comparative advantage in
producing small home electronic devices such as TVs &
cameras
 US -comparative advantage in entertainment industry,
exporting movies & TV shows
 Ex) Disney exports theme park management skills to Japan,
Hong Kong, etc.
 Only the strongest & best producers survive

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