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Module 3
Comparative Advantage and Trade
What’s New in the Fourth Edition?
• Worksheets for use in the classroom.
• New Economics in Action case study.
Module Objectives
• How does trade lead to gains for an individual or an economy?
• What is the difference between absolute advantage and comparative advantage?
• How does comparative advantage lead to gains from trade in the global marketplace?
• How is opportunity cost related to comparative advantage and specialization?
Teaching Tips
Comparative Advantage and Gains from Trade
Creating Student Interest
• Ask students if they agree with the idea that if it is cheaper to buy a product from another country
than it is to make it yourself, you should buy it from the other country.
Presenting the Material
• Take some time to review the example in the text to illustrate comparative advantage and gains
from trade. Next, you can work the example below. Explain to students that in this Module we are
ignoring dollars and will simply trade one good directly for another in order to keep things simple.
• Give a simple example of two economies that can produce the following two goods, in the same
time period, with a fixed amount of resources. Assume a straight line production possibility
frontier.
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Lozano has an absolute advantage in producing both goods because he can produce more of each
individual good than Bilma. Carefully review the concept of opportunity cost and show students
how to calculate it. Opportunity cost is what you give up relative to what you gain—for Lozano it
is 40 pizzas relative to 20 colas, or 2 pizzas per cola. Since Bilma has a higher opportunity cost (4
pizzas per cola) it will produce the pizza.
Show students this also can be done in reverse by finding the opportunity cost of producing pizza.
To illustrate the gains from trade, assume that Lozano initially produces and consumes 12 pizzas
Common Student Pitfalls
• Comparative or Absolute Advantage. Students confuse absolute advantage with comparative
advantage. Explain that absolute advantage means you can produce more than someone else can.
Comparative advantage means that you can produce something at a lower opportunity cost than
someone else.
Use the example of two students working on a joint project. One student may be better at every task
Module Outline
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I. Comparative Advantage and Gains from Trade
A. Comparative advantage, not absolute advantage, is the basis for the gains from trade.
B. The concepts of absolute advantage and comparative advantage apply to individuals, firms, and
countries.
C. The gains from trade are illustrated in text Figure 3-2 (shown next), with a straight-line
production possibility frontier for each of two countries:
Figure 3-2
D. Individuals or countries will engage in trade only if the price of the good each is obtaining
from trade is less than its own opportunity cost of producing the good.
E. This example highlights two important lessons:
1. Both countries are able to produce more and consume more in total.
2. Each country has a comparative advantage in the production of something.
F. Although economists have a very positive view of international trade, politicians and the public
sometimes have a negative view of international trade.
Case Studies in the Text
Economics in Action
Rich Nation, Poor Nation—Much of our clothing is produced in other countries that are poorer than the
United States. The case study explains that this is because the countries have a comparative advantage in
producing clothing.
Ask students the following questions:
Web Resources
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Handout 3-1
Date_________ Name____________________________ Class________ Professor________________
Comparative Advantage
Activity 1:
Working with a partner, each student should do each of the following tasks for 30 seconds: marking
the same sized X on a sheet of paper and turning pages in a book. At the end of the time, record the
number of Xs drawn and the number of pages turned. Answer the following questions:
Given the data for both goods for both partners, what is the opportunity cost of producing each good?
Who has comparative advantage in the production of Xs?
Who has comparative advantage in the turning of pages?
Activity 2:
What comparative advantages does the United States have?
Do a brief internet search to determine what products the United States exports the most. List them.
How do these products compare with the comparative advantages listed above?
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Activity 3:
Consider the pros and cons of the following two statements:
“The United States should limit imported textiles from China.”
Pros
Cons
“The United States should prohibit the import of products from abroad that are made with child
labor.”
Pros
Cons