Lastly, in the global economy, trade happens all the time. Let’s face it: some countries are just better at some things than others. There are two ways to see which countries are better at what: absolute and comparative advantage. Absolute advantage happens when one country is able to produce more of something than another. Comparative advantage happens when one country is able to produce something with less opportunity cost than the other. This opportunity cost can be looked at as the tradeoffs that occur in the PPC, which was reviewed in module 1. Here’s a video on trade that considers these two types of advantages:

Let’s walk through an example together to give you a better understanding. Below is a table with two countries, Econovia and Macroland, who are trying to trade boats and cars. Each cell entry is the amount of each good that could be produced if all resources were only allocated on that one singular good. Let’s pretend both countries are only going to produce one or the other, and no other goods otherwise.

Who has the absolute advantage in cars? Macroland does, but they also have it in boats as well, since they are able to produce more of both than Econovia given they use all their resources on just one good. A country can have absolute advantage in making both goods, one good, or neither.

When looking at comparative advantage, for every car Macroland makes, they lose the opportunity to make 80/40 = 2 boats with the same resources. However, Econovia loses 60/20 = 3 boats, meaning that Macroland can make cars with less of an opportunity cost, and thus has the comparative advantage in making cars.

But Econovia then has the comparative advantage in making boats, since 20/60 = 1/3 cars is less than 80/40 = 1/2 cars. As it’s clear that the opportunity cost the other way around is just the reciprocal, it’s impossible for one country to have a comparative advantage in both goods. However, this means trade can flourish, as unless both countries are just as good at making both products as each other, both countries can specialize and trade in order to make more products together than separately.

Econovia wants to trade a car from Macroland for less than 3 boats because if not, they can just make the cars themselves instead of the boats. But Macroland wants to trade each car sold for more than 2 boats, or else they could just make the boats themselves rather than trade for them. This leaves us with anything between 2 to 3 boats for a car as an option, so a car for 2.5 boats is considered valid terms of trade.

However, money is also transferred over quite a lot in different forms when trading globally. This video talks a bit about different currencies, exchange rates, and what happens when those exchange rates change.

If you’re at all confused about appreciation and depreciation, think of it as the value of that dollar. If you can purchase more with the dollar, it has appreciated. As such, when other people try to buy your products after your dollar has appreciated, they have to use more of their own currency which means your exports are more expensive. Similarly, now your dollar can buy more of other countries’ things, so imports are cheaper.

Great job, you just finished all of the econ materials for this competition! If you need more review, look back through the previous modules and take more notes on the videos, as they are quite intricate and very well-structured. You may also look in the resources page for extra materials. We hope to see you competing very soon!

Quiz

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