n 3.3       Economic Growth

Economicgrowthis the sustained expansion of production possibilities. Economicgrowth shifts the PPF outward.

The (Opportunity) Cost of Economic Growth

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• Economic growth     requires that resources must be devoted to developing technology or     accumulating capital, which means that current consumption decreases. The     decrease in current consumption is the opportunity cost of economic     growth. This result demonstrates that economic growth is not “free.”

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• Countries that     devote a higher share of resources to developing technology or accumulating     capital are more likely to grow faster.

n 3.4       Specialization and Trade

Specializationof labor results in greater productivity. Absolute advantage occurs when one person(or nation) is more productive than another (needs fewer inputs or takes lesstime to produce a good or perform a production task).

ComparativeAdvantage

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• A person has a comparative     advantage     in an activity if that person can perform the activity at a lower     opportunity cost than anyone else.

qLand Mine: Absoluteadvantage and comparative advantage are concepts that give students trouble. Itflies in the face of intuition to say that even though someone has the abilityto produce something using fewer resources than someone else, nonetheless, itstill pays for the two to trade. It is an especially difficult concept to graspwhen you up the ante by saying that the same would still be true even if thatperson enjoyed an absolute advantage in everything over their trading partner!This might be a good opportunity to use a very concrete example that students shouldbe able to compute right in the classroom. Lay out the following scenario:Assume Suzie, a computer consultant, is very good at repairing computers andalso happens to be a very good house painter. In fact, she is so good that itturns out she is more productive at both things than her neighbor, Bob, who hap

                 

	Time it takes Suzie	Time it takes Bob
Repair a computer	2 hours	24 hours
Paint a house	30 hours	48 hours

        pens to paint houses for a living. Tothe right is a table that shows the amount of time it takes for Suzie and Bobto perform each of the two activities. In addition, let’s assume that Suzie andBob earn $100 per computer repaired and Bob and Suzie earn $960 per housepainted. Ask the students to compute the opportunity cost for Suzie and Bobrepairing a computer and painting a house.

                 

	Opportunity cost for Suzie	Opportunity cost for Bob
Repair a computer	$64	$480
Paint a house	$1,500	$200

The new table to theright contains the opportunity costs. (To calculate these numbers, take Suzie’sopportunity cost of painting a house. In the 30 hours it takes her to paint ahouse, she could have repaired 15 computers, so the opportunity cost is 15computers times $100 each, or $1,500.) The table reveals that Suzie has thelower opportunity cost of repairing computers and Bob has the lower opportunitycost of painting houses. What this example demonstrates so powerfully is that aperson can have an absolute disadvantage in everything, as is the case for Bob,but still manage to have a comparative advantage in an activity. Point out tostudents that this logic applies between individuals and also across cities,states, and nations.

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• The PPF shows     opportunity cost of the goods. In the figure the opportunity cost of a     bushel of wheat inCanada    is 1/4 of a computer and inJapanit is 1 computer. InCanadathe opportunity cost of a computer     is 4 bushels of wheat and inJapanit is 1 bushel of wheat.    Canadahas a     comparative advantage in producing wheat andJapanhas a comparative     advantage in producing computers.

Achieving Gainsfrom Trade

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• When countries specialize by producing the good in     which each country has a comparative advantage more goods in total can be     produced. If    CanadaandJapan    each produce at point A, a total of 8 computers and 16 bushels     of wheat are produced. If they specialize according to comparative     advantage, a total of 12 computers and 24 bushels of wheat are produced.

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•  Trade allows consumption to be different     than production for each nation, soCanada    can trade wheat for computers andJapancan trade computers for     wheat. Because more computers and more wheat are produced, both nations     can consume more than they can produce on their own.

Exchange is not a zero-sum game. If it isvoluntary, both parties will believe they are better off, by definition (orelse they would never agree to the trade in the first place). Imagine whatwould happen to your consumption if you couldn’t trade and had to beself-sufficient. How would self-sufficiency impact your level of consumption offood? Clothing? Transportation? Communications? Entertainment? Health care?Education?  The gains from trade explainwhy an individual, a household, a city, a state, and even a country typicallychoose not to be entirely self-sufficient.

USING EYE ONYOUR LIFE

nYour Production Possibilities Frontier

The example of a student who must allocate his or her time betweenstudying and other events illustrated in this Eye really strikes home forstudents and is a truly great example. However, economists generally do notanalyze people’s decisions using the PPF.Instead, economists typically use utility functions or indifference curves.It’s probably wise to use this Eye to stress two points to the students: First,there are other ways of analyzing other people’s behavior. Second, the PPF deals with production so, as this Eye shows, we are looking at the productionof grades. Students do not know the first point and it is easy for them tooverlook the second, so both points are worthwhile.

nYour Comparative Advantage

Ask your students what they envision for their future careers. Thenask them why they expect to be successful at this endeavor and tell them to usethe concept of comparative advantage in their answer

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