2.01 Comparative Advantages - robertbove

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      

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