AP Microeconomics / Unit 1: Basic Economic Concepts
1.4 Comparative Advantage and Trade
Notes
Specialize in the good with the lower opportunity cost and trade.
- Output method: opportunity cost of X = what you give up ÷ what you gain.
- Terms of trade must lie between both producers' opportunity costs.
Practice
Ana makes 10 shirts or 5 hats; Ben makes 6 shirts or 6 hats. Who has the comparative advantage in hats?
Ben gives up 1 shirt per hat; Ana gives up 2.
Ana's opportunity cost of 1 shirt:
$\displaystyle \frac{5}{10}$.
Who has the absolute advantage in shirts?
10 vs 6.
Ready for more? Take the Unit 1 test.