#AP Macroeconomics: Unit 1 - Comparative Advantage and Trade 🚀

Hey! Let's get you prepped for the exam with a super clear breakdown of comparative advantage and trade. This is a foundational topic, so nailing it down is key!

# Key Concepts 🔑

#Absolute Advantage

- It's about who can produce more, plain and simple. - A country has an absolute advantage if it can produce a good at a lower cost, or in less time, than its competitors.

#Comparative Advantage

- It's not about being the best, but about being the *least worst* at something. - Countries should specialize in producing goods where they have a comparative advantage.

#Terms of Trade

• The rate at which one good can be exchanged for another. It's like the price of trade!
• These must fall between the opportunity costs of both trading partners to be beneficial.

# Introduction 🌍

International trade is all about specialization and efficiency. Countries trade to gain a competitive edge and boost their economies. The core idea is that by focusing on what they do best (comparative advantage), countries can achieve higher overall production and consumption.

#Types of Problems: Output vs. Input 🧮

• Output Problems: Focus on how much can be produced with a given set of resources.
• Input Problems: Focus on how much of a resource is needed to produce one unit of a good.

# Output Problems 🏭

#Rules to Remember:

• Absolute Advantage: Look for the highest output.
• Comparative Advantage: Calculate the per-unit opportunity cost using: give up / gain. The lowest cost wins!
• If both countries produce the same amount, neither has an absolute advantage.
• Countries export what they have a comparative advantage in and import what they don't.

#Example: Canada vs. Japan 🇨🇦 🇯🇵

Let's use the example from your notes:

#Determining Absolute Advantage

#Determining Comparative Advantage

- **Canada:** - Opportunity cost of 1 steel = 500 coal / 1000 steel = 1/2 coal - Opportunity cost of 1 coal = 1000 steel / 500 coal = 2 steel - **Japan:** - Opportunity cost of 1 steel = 300 coal / 1200 steel = 1/4 coal - Opportunity cost of 1 coal = 1200 steel / 300 coal = 4 steel

• Japan has a comparative advantage in steel (1/4 < 1/2).
• Canada has a comparative advantage in coal (2 < 4).

#Trade Pattern

• Japan will export steel to Canada and import coal from Canada.

#Terms of Trade

• Acceptable terms of trade:
  • 1 coal = 3 units of steel (between Canada's cost of 2 and Japan's cost of 4)
  • 1 steel = 1/3 units of coal (between Japan's cost of 1/4 and Canada's cost of 1/2)

# Input Problems ⚙️

#Rules to Remember:

• Absolute Advantage: Look for the lowest input.
• Comparative Advantage: Calculate the per-unit opportunity cost using: gain / give up. The lowest cost wins!
• If both countries use the same amount of resources, neither has an absolute advantage.
• Countries export what they have a comparative advantage in and import what they don't.

#Example: Brazil vs. United States 🇧🇷 🇺🇸

#Determining Absolute Advantage

#Determining Comparative Advantage

- **Brazil:** - Opportunity cost of 1 car = 1 truck / 2 cars = 1/2 truck - Opportunity cost of 1 truck = 2 cars / 1 truck = 2 cars - **United States:** - Opportunity cost of 1 car = 2 truck / 4 cars = 1/2 truck - Opportunity cost of 1 truck = 4 cars / 2 truck = 2 cars

• Brazil has a comparative advantage in trucks (1 < 2).
• United States has a comparative advantage in cars (1/2 < 1).

#Trade Pattern

• Brazil will export trucks to the United States and import cars from the United States.

#Terms of Trade

• Acceptable terms of trade:
  • 1 truck = 1.5 cars (between Brazil's cost of 1 and the US's cost of 2)
  • 1 car = 3/4 of a truck (between the US's cost of 1/2 and Brazil's cost of 1)

# Terms of Trade ⚖️

• It's the ratio of a country's export prices to its import prices.
• A favorable terms of trade means a country can buy more imports with the same amount of exports (good!).
• An unfavorable terms of trade means a country needs to export more to buy the same amount of imports (bad!).
• Influenced by:
  • Exchange rates 🔁
  • Raw material prices 🛢
  • Global demand 🌏

# Final Exam Focus 🎯

• High-Value Topics:

  • Comparative advantage (both output and input problems)
  • Terms of trade and their impact
  • Understanding the difference between absolute and comparative advantage

• This unit is foundational and often linked to other units, so make sure you have a solid understanding.

• Common Question Types:
  • Calculating opportunity costs
  • Identifying absolute and comparative advantages
  • Determining trade patterns
  • Analyzing the impact of terms of trade changes

• Exam Tips:

• Common Mistakes:

# Practice Questions 📝

Practice Question

#Multiple Choice Questions

1. Suppose that in Canada, one worker can produce 10 bushels of wheat or 6 bushels of corn in a day. In the United States, one worker can produce 8 bushels of wheat or 4 bushels of corn in a day. Which of the following is true? (A) Canada has a comparative advantage in the production of both wheat and corn. (B) The United States has a comparative advantage in the production of both wheat and corn. (C) Canada has a comparative advantage in the production of wheat, and the United States has a comparative advantage in the production of corn. (D) Canada has a comparative advantage in the production of corn, and the United States has a comparative advantage in the production of wheat. (E) Neither country has a comparative advantage.

2. Assume that the opportunity cost of producing 1 ton of steel in Japan is 2 tons of aluminum. Assume that the opportunity cost of producing 1 ton of steel in the United States is 3 tons of aluminum. Given this information, which of the following is true? (A) Japan has a comparative advantage in the production of aluminum. (B) The United States has a comparative advantage in the production of steel. (C) Japan has a comparative advantage in the production of steel. (D) The United States has an absolute advantage in the production of steel. (E) Japan has an absolute advantage in the production of aluminum.

3. A country’s terms of trade will improve when (A) the country’s export prices rise and its import prices fall. (B) the country’s export prices fall and its import prices rise. (C) both the country’s export and import prices rise. (D) both the country’s export and import prices fall. (E) the country’s exports and imports remain unchanged.

#Free Response Question

The following table shows the maximum amount of two products, widgets and gadgets, that can be produced per day in two countries, Alpha and Beta.

Country	Widgets	Gadgets
Alpha	100	50
Beta	120	40

(a) Which country has the absolute advantage in the production of widgets? Explain. (2 points) (b) Calculate the opportunity cost of producing one widget in Alpha. (1 point) (c) Calculate the opportunity cost of producing one widget in Beta. (1 point) (d) Which country has the comparative advantage in the production of widgets? Explain. (2 points) (e) If the two countries trade, which country will export widgets? Explain. (1 point) (f) Identify a terms of trade that would be mutually beneficial for both countries. (1 point)

#FRQ Scoring Breakdown:

(a)

• 1 point: Beta has the absolute advantage in the production of widgets.
• 1 point: Beta can produce more widgets (120) than Alpha (100).

(b)

• 1 point: The opportunity cost of one widget in Alpha is 0.5 gadgets (50/100).

(c)

• 1 point: The opportunity cost of one widget in Beta is 0.33 gadgets (40/120).

(d)

• 1 point: Beta has the comparative advantage in the production of widgets.
• 1 point: Beta has a lower opportunity cost of producing widgets (0.33 gadgets) than Alpha (0.5 gadgets).

(e)

• 1 point: Beta will export widgets because it has the comparative advantage in the production of widgets.

(f)

• 1 point: Any terms of trade between 0.33 and 0.5 gadgets per widget is acceptable. For example, 1 widget for 0.4 gadgets.

You've got this! Keep reviewing, and you'll be ready to ace the exam. 🌟