Comparative Advantage and Gains from Trade: When Trade Doesn't Pay

Economics Grades High School 6:50 Video
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Lesson Description

Explore the conditions under which countries do not benefit from trade, focusing on comparative advantage and opportunity costs. Learn to analyze production possibilities and determine if gains from trade are possible.

Video Resource

When there aren't gains from trade | Basic economics concepts | AP Macroeconomics | Khan Academy

Khan Academy

Duration: 6:50
Watch on YouTube

Key Concepts

  • Comparative Advantage
  • Opportunity Cost
  • Gains from Trade
  • Production Possibilities

Learning Objectives

  • Define comparative advantage and opportunity cost.
  • Calculate opportunity costs for different countries producing different goods.
  • Determine when there are no gains from trade based on opportunity costs.
  • Interpret production possibility frontiers to understand opportunity costs graphically.

Educator Instructions

  • Introduction (5 mins)
    Begin by reviewing the basic principles of comparative advantage and gains from trade. Briefly discuss the video's aim: to explore situations where trade might not be beneficial.
  • Video Viewing (10 mins)
    Play the Khan Academy video 'When there aren't gains from trade'. Instruct students to take notes on key concepts like opportunity cost and production possibilities.
  • Guided Discussion (15 mins)
    Lead a discussion focusing on the video's example. Ask students to explain in their own words why there are no gains from trade when opportunity costs are equal. Reiterate the importance of differing opportunity costs for mutually beneficial trade.
  • Practice Problems (15 mins)
    Provide students with new scenarios involving two countries and two goods. Have them calculate opportunity costs and determine if gains from trade are possible. One example: Country X can produce 5 cars or 10 computers, while Country Y can produce 2.5 cars or 5 computers.
  • Wrap-up (5 mins)
    Summarize the main points of the lesson. Emphasize that comparative advantage, driven by differing opportunity costs, is essential for gains from trade. Mention real-world factors that might prevent trade even when comparative advantage exists.

Interactive Exercises

  • Comparative Advantage Calculator
    Create a simple spreadsheet where students can input production data for two countries and two goods. The spreadsheet automatically calculates opportunity costs and identifies if there is a comparative advantage for either country.
  • PPF Graphing Exercise
    Provide students with production data and have them graph the production possibility frontiers for two countries. They should then visually compare the slopes of the PPFs to determine if there are gains from trade.

Discussion Questions

  • What is the relationship between opportunity cost and comparative advantage?
  • Why is it important for countries to have different opportunity costs for trade to be beneficial?
  • Can you think of real-world examples where countries might choose not to trade even if there is a comparative advantage?
  • How can production possibility frontiers visually represent opportunity costs?

Skills Developed

  • Critical Thinking
  • Problem Solving
  • Analytical Skills
  • Economic Reasoning

Multiple Choice Questions

Question 1:

What is the fundamental requirement for two countries to benefit from trade?

Correct Answer: Differing opportunity costs

Question 2:

If Country A can produce 10 units of good X or 5 units of good Y, and Country B can produce 5 units of good X or 10 units of good Y, what can you conclude?

Correct Answer: Neither country has a comparative advantage

Question 3:

Opportunity cost is best defined as:

Correct Answer: The value of the next best alternative forgone

Question 4:

When two countries have the same opportunity costs for producing two goods, what is the likely outcome?

Correct Answer: There will be no gains from trade

Question 5:

What does a production possibilities frontier (PPF) illustrate?

Correct Answer: The maximum output combinations of two goods

Question 6:

If the PPFs of two countries have the same slope, this indicates:

Correct Answer: They have the same opportunity costs.

Question 7:

Comparative advantage implies:

Correct Answer: Producing at a lower opportunity cost

Question 8:

Which of the following is NOT a reason why trade might not occur even with differing opportunity costs?

Correct Answer: Identical opportunity costs

Question 9:

Country A can produce 5 cars or 15 bushels of wheat. Country B can produce 3 cars or 9 bushels of wheat. Which statement is true?

Correct Answer: There is no comparative advantage for either country.

Question 10:

Equal opportunity costs between two countries will result in:

Correct Answer: No basis for trade

Fill in the Blank Questions

Question 1:

The concept of _________ _________ is crucial for determining if trade is beneficial.

Correct Answer: comparative advantage

Question 2:

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

Correct Answer: opportunity cost

Question 3:

If two countries have identical _________ _________, there is no basis for mutually beneficial trade.

Correct Answer: opportunity costs

Question 4:

A graphical representation of the maximum output combinations of two goods is called a _________ _________ _________.

Correct Answer: production possibilities frontier

Question 5:

The _________ of a PPF reflects the opportunity cost of producing one good in terms of the other.

Correct Answer: slope

Question 6:

When countries have different opportunity costs, it leads to _________ in production.

Correct Answer: specialization

Question 7:

Even with comparative advantage, _________ _________ can prevent trade between countries.

Correct Answer: trade barriers

Question 8:

If a country can produce a good at a lower opportunity cost than another country, it has a _________ _________ in that good.

Correct Answer: comparative advantage

Question 9:

The absence of _________ _________ implies that countries have the same relative costs of production.

Correct Answer: comparative advantage

Question 10:

For trade to be mutually beneficial, each country should specialize in the production of goods where it has a lower _________ _________.

Correct Answer: opportunity cost

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.1.2:Determine appropriate courses of economic actions using a variety of economic reasoning and decision-making models.

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