Unlocking Trade: Opportunity Cost and Comparative Advantage

Economics Grades High School 9:55 Video
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Lesson Description

Learn how to use production possibility curves and output tables to determine opportunity costs and comparative advantage between countries, setting the stage for understanding international trade.

Video Resource

Opportunity cost and comparative advantage using an output table | AP Macroeconomics | Khan Academy

Khan Academy

Duration: 9:55
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Key Concepts

  • Opportunity Cost
  • Comparative Advantage
  • Production Possibility Curve (PPC)
  • Output Table

Learning Objectives

  • Students will be able to calculate opportunity cost from production possibility curves and output tables.
  • Students will be able to determine comparative advantage between two countries based on opportunity costs.
  • Students will be able to explain how comparative advantage can lead to specialization and trade.

Educator Instructions

  • Introduction (5 mins)
    Begin by reviewing the concepts of scarcity and production possibilities. Briefly discuss why countries can't produce everything they want and must make choices.
  • Video Viewing (15 mins)
    Play the Khan Academy video 'Opportunity cost and comparative advantage using an output table'. Encourage students to take notes on the key definitions and examples.
  • Output Table Construction (10 mins)
    Guide students to create an output table from a given scenario or PPC graph. Emphasize the importance of identifying maximum production levels for each good in each country.
  • Opportunity Cost Calculation (15 mins)
    Work through several examples of calculating opportunity cost from the output table. Explain how the opportunity cost of producing one good is the amount of the other good that must be sacrificed.
  • Comparative Advantage Identification (10 mins)
    Explain that comparative advantage lies with the country that has the lower opportunity cost of producing a particular good. Work through examples to illustrate this concept.
  • Class Discussion and Application (15 mins)
    Discuss the implications of comparative advantage for international trade. How do countries benefit from specializing in the production of goods in which they have a comparative advantage? What are some real-world examples of comparative advantage?
  • Assessment (10 mins)
    Administer the multiple choice and fill-in-the-blank quizzes.

Interactive Exercises

  • Comparative Advantage Simulation
    Divide students into groups representing different countries. Provide them with production possibilities for two goods and have them calculate opportunity costs and determine comparative advantage. Then, have them simulate trade based on these advantages.

Discussion Questions

  • How does scarcity influence the concept of opportunity cost?
  • Why is it beneficial for countries to specialize in the production of goods where they have a comparative advantage, even if they have an absolute advantage in all goods?
  • Can you think of any real-world examples where countries specialize in certain products due to comparative advantage?

Skills Developed

  • Analytical Thinking
  • Problem-Solving
  • Critical Thinking
  • Data Interpretation

Multiple Choice Questions

Question 1:

Opportunity cost is best defined as:

Correct Answer: The value of the next best alternative forgone

Question 2:

A country has a comparative advantage in producing a good if it:

Correct Answer: Has the lowest opportunity cost of producing the good

Question 3:

What does a Production Possibilities Curve (PPC) illustrate?

Correct Answer: The maximum combinations of goods and services an economy can produce

Question 4:

An output table shows:

Correct Answer: The maximum amount of goods that can be produced

Question 5:

If Country A can produce 10 cars or 20 bushels of wheat, and Country B can produce 12 cars or 24 bushels of wheat, which country has the comparative advantage in producing cars?

Correct Answer: Neither country

Question 6:

If Country A has a comparative advantage in producing wheat, what does this imply?

Correct Answer: Country A should export wheat.

Question 7:

Specialization and trade are beneficial because they:

Correct Answer: Allow countries to consume beyond their PPC

Question 8:

Which of the following is the MOST direct result of specialization?

Correct Answer: Greater interdependence

Question 9:

Why does comparative advantage lead to increased economic efficiency?

Correct Answer: It allocates resources to their most productive uses.

Question 10:

A country with a lower opportunity cost of production will always have a(n) _________ in that product.

Correct Answer: comparative advantage

Fill in the Blank Questions

Question 1:

The value of the next best alternative forgone is known as __________ ___________.

Correct Answer: opportunity cost

Question 2:

A __________ __________ __________ shows the maximum combinations of goods and services an economy can produce.

Correct Answer: production possibilities curve

Question 3:

A country has a __________ __________ in producing a good if it can produce it at a lower opportunity cost than another country.

Correct Answer: comparative advantage

Question 4:

An __________ __________ presents the maximum amount of goods that can be produced with a given set of resources.

Correct Answer: output table

Question 5:

If producing one more unit of Good A requires giving up fewer units of Good B than another country, the country has a comparative advantage in __________.

Correct Answer: Good A

Question 6:

__________ occurs when countries focus on producing the goods and services where they have a comparative advantage.

Correct Answer: Specialization

Question 7:

__________ and __________ allow countries to consume beyond their own production possibilities.

Correct Answer: Specialization, trade

Question 8:

Even if a country has an absolute advantage in everything, it can still benefit from trade by focusing on its __________ __________.

Correct Answer: comparative advantage

Question 9:

Trade based on comparative advantage leads to more efficient __________ __________ and increased overall production.

Correct Answer: resource allocation

Question 10:

The opportunity cost of a basketball in country A is 0.75 pairs of shoes. The opportunity cost of a basketball in country B is 1 pair of shoes. Country _________ has a comparative advantage in basketball production.

Correct Answer: A

Educational Standards

SOC.9-12.E.1.1:Define and apply basic economic concepts of money supply, scarcity, surplus, choice, opportunity cost, cost/benefit analysis, risk/reward relationship, incentive, disincentive, and trade-off to a variety of economic situations. SOC.9-12.E.2.5:Describe the impact of comparative and absolute advantage upon the three basic economic questions. SOC.9-12.E.2.2:Describe the role of the factors of production, land, labor, capital, entrepreneurship, and technology as well as the place of imports and exports in economic systems.

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