1Econ 101 M. SalemiComparative Advantage and TradeReviewMore on Production PossibilitiesInside, On and Outside the PPFComparative Advantage and TradeTo take advantage of the benefits of specialization people must trade.Why are “free trade” proposals controversial?What have we learned?Econ 101 M. SalemiReviewThe Principle of Comparative Advantage says that everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is the lowest.The production possibilities graph describes the maximum amount of one good that can be produced for every possible level of production of the other good.Econ 101 M. SalemiReviewAri and Sam must write a class report with charts. In one hour…Ari can write 300 words or make 3 charts.Sam can write 200 words or make 1 chart.Ari should Chart.Sam should write.Cost of 100 WordsCost of One ChartAri 1 Chart 100 WordsSam ½ Chart 200 Words2Econ 101 M. SalemiAri and Sam Joint Production Possibilities Frontier0481216202428320 4 8 1216202428323640100's of WordsChartsAri specializes in charts, Sam splits her time.Sam specializes in words,Ari splits her time.The FrontierEcon 101 M. SalemiUse Your Clickers To Answer The Following Graded QuestionEcon 101 M. SalemiWhich of the following best explains the connection between the principle of comparative advantage and Ari and Sam’s Production Possibilities Frontier (PPF)?A. Sam and Ari are inside the PPF unless Sam spends all her time writing.B. Sam and Ari are inside the PPF unless Sam spends all her time charting.C. The steeper slope of the PPF occurs when the opportunity cost of written words decreases.D. The steeper slope of the PPF occurs when Ari begins to write instead of to chart.Econ 101 M. SalemiReview SurvivorsFour survivors are stuck on an island. Each can either fish or gather berries. The following table shows what each survivor can produce in a day.Jean Joe Jerry JackFish(lbs) 4 3 2 1Berries(lbs) 1 2 3 43Econ 101 M. SalemiUse Your Clickers To Answer The Following Non-Graded QuestionEcon 101 M. SalemiReview SurvivorsGiven the survivors produce 6 lbs of fish efficiently, what is their opportunity cost for 1 pound of fish?A. 1/4 pound of berriesB. 2/3 pounds of berriesC. 1.5 pounds of berriesD. 4 pounds of berriesJean Joe Jerry JackFish(lbs) 4 3 2 1Berries(lbs) 1 2 3 4Econ 101 M. SalemiWhat are theProduction PossibilitiesAvailable to the SurvivorsGiven Their Individual Skills?Anna Mullen’s Winning EntryJerryJean4Econ 101 M. SalemiSurvivors' PPF012345678910012345678910Pounds of BerriesPounds of FishJackieJerryJoeJeanWhose Cost Defines the Survivors' Opportunity Cost?Econ 101 M. SalemiInsideOutside and On The Production Possibilities FrontierEcon 101 M. SalemiInside the PPF Resources are Under Employed.Survivors' PPF02468100246810Pounds of BerriesPounds of FishPoints Inside the PPF Result From Underemployment of ResourcesEcon 101 M. SalemiOutside the PPF Is Not Possible Survivors' PPF024681012024681012Pounds of BerriesPounds of FishPoints Outside the PPF are Not Attainable5Econ 101 M. SalemiEconomic Growth Provides More or Improved Resources and Shifts the PPF Toward Higher Levels of OutputWhat happens to the PPF of the survivors if they discover a fifth survivor who can produce either 3 lbs of fish or 2 lbs of berries per day? Jean Joe Jerry JackFish(lbs) 4 3 2 1Berries(lbs) 1 2 3 4Econ 101 M. SalemiTo Benefit From Specialization People Must Trade.Econ 101 M. SalemiComparative Advantage and TradeBoth Kansas and California can produce beef cattle and grapes. Assume the value of labor and other needed inputs is the same per acre in each state and for each product.In Kansas an acre of land can be used to produce 300 pounds of beef or 100 pounds of grapes.In California, and acre of land can be used to produce 150 pounds of beef or 200 pounds of grapes.Econ 101 M. SalemiUse Your Clickers To Answer The Following Graded Question6Econ 101 M. SalemiIn Kansas: 300 lbs of beef or 100 lbs of grapes.In California: 150 lbs of beef or 200 lbs of grapes.Which of the Following is Correct?A. California has a comparative advantage in grape production because its opportunity cost of grapes is lower.B. California has a comparative advantage in grape production because its opportunity cost of grapes is higher.C. Kansas has a comparative advantage in grape production because its opportunity cost of grapes is lower.D. Kansas has a comparative advantage in grape production because its opportunity cost of grapes is higher.Econ 101 M. SalemiComparative Advantage and TradeThe cost of producing a lb. of grapes in Kansas is 3 lbs. of beef.Kansas will be better off specializing in beef, if it can buy grapes for less than 3 lbs. of beef.The cost of producing a lb. of grapes in California is ¾ lbs. of beef.California will be better off specializing in grapes if it can sell grapes for more than ¾ lbs. of beef. Econ 101 M. SalemiComparative Advantage and TradeBoth Kansas and California will respond to the price of grapes and beef.The optimal response will depend on the relative price of grapes and beef.Decision makers in both states will ask whether it is better to obtain goods by producing them or by trading for them.Econ 101 M. SalemiComparative Advantage and TradeHow Kansas and California Respond to the Price of Grapes00 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4Price of Grapes Measured in Pounds of BeefKansas Produces Beef and Buys GrapesKansas Produces GrapesCalifornia Produces Grapes and Buys BeefCalifornia Produces Beef7Econ 101 M. SalemiSuppose the price of a pound of grapes Is 1.5 pounds of beef…The Effects of Specialization on Kansas0501001502000 50 100 150 200 250 300Lbs. of Beef per AcreLbs. of GrapesKansas Production PossibilitiesKansas Opportunities if it Specializes in Beef and Trades for GrapesEcon 101 M. SalemiComparative Advantage and TradeIf the benefits of trade are so great, why is “free trade”so controversial?Econ 101 M. SalemiCAFTA ProtestsEcon 101 M. SalemiMarch 13, 2005 Thousands of Hondurans demonstrated across the country on March 8 to protest the National Congress's March 3 vote for the Central American Free Trade Agreement (CAFTA). The protests were organized by the Popular Resistance, which estimates that CAFTA will drive 300,000 campesino families out of business, forcing 800,000 Hondurans into unemployment. Some 2,000 people marched in Tegucigalpa from Obelisk Park to the Congress building, chanting: "With this