This lesson will discuss absolute advantage, comparative advantage, specialization and trade with an example using professional basketball player LeBron James.
- Apply the concepts of opportunity costs, absolute and comparative advantage, as well as provide examples, to LeBron James mowing his own lawn scenario.
- Use data to assess the gains available through trade and specialization.
- Identify and utilize the concepts presented in the LeBron James scenario to real world examples.
- Apply the concepts presented to international trade, including imports and exports.
Ask the students to consider the following questions:
Should a country produce everything it wants? Why or Why not?
If Country A is better than Country B at producing everything, would Country A gain anything by trading with Country B?
- When a new home is built, why doesn't one person do the carpentry, electrical, plumbing and landscaping?
Explain to the students that they will look at these questions again after considering an interesting example involving LeBron James.
Law of Comparative Advantage: This site provides an extensive definition of the Law of Comparative Advantage.
Bureau of Economic Analysis (BEA): The BEA promotes a better understanding of the U.S. economy by providing the most timely, relevant, and accurate economic accounts data in an objective and cost-effective manner.
Top Trading Partners for May, 2010: This U.S. Census Bureau page provides foreign trade statistics.
Top US Imports & Exports 2009: Provides a detailed list of top imports and exports, including the fastest-growing areas.
Gains from Trade: This site provides a visual representation and explanation for the benefits from international trade.
Start by reviewing or introducing a few economic terms:
Opportunity Cost The value of the next best alternative. For example, the opportunity cost of studying on Friday night might be missing your high school team's football game. As a quick review of the opportunity cost term you might ask the students why LeBron James chose not to attend college and play college basketball. An economist would answer this question by stating that the opportunity cost of college (making millions in the NBA) was too high for James.
Comparative Advantage The ability to produce something at a lower opportunity cost than other producers.
Law of Comparative Advantage An individual, firm, region or country with the lowest opportunity cost of producing a good should specialize in that good.
Absolute Advantage The ability to produce something using fewer resources than other producers.
Now that the students have an understanding of these terms you can apply them using an interesting example about NBA star LeBron James.
Tell the students to assume LeBron is both a great basketball player and a great lawn mower. However, LeBron has a young neighbor named Scotty who is willing to mow his lawn. Write the following facts on the board (perhaps in the form of a table):
LeBron can mow his lawn in two hours. He could also film a Nike commercial in two hours and make $10,000. So, James' opportunity cost of mowing his lawn is $10,000.
Neighbor Scotty can mow LeBron's lawn in four hours. He could also work at McDonald's for four hours and make $8 per hour. So, Scotty's opportunity cost of mowing LeBron's lawn is $32.
Who has an absolute advantage in mowing the lawn? [LeBron James-- he can do it in less time. So, James is better at mowing grass than Scotty.]
Who has comparative advantage in mowing the lawn? [Scotty-- he can do it at a lower opportunity cost ($32 versus $10,000).]
From this example, we can see that LeBron James is better than Scotty at mowing grass. Would LeBron benefit from a trade? [Yes, as long as James pays Scotty more than $32 to mow his grass they both benefit from the trade.]
We can apply this to many real world examples. This analysis suggests that we should specialize in what we're good at and trade with others for other things we want. Such a rule explains why:
1. We generally don't grow our own food.
2. Factories often use assembly lines.
3. Basketball or football players often specialize in one position as opposed to playing all of them.
4. Your teacher may teach economics, history, and government but likely does not also teach physical education and chemistry.
*Teacher note: These are just a few examples, feel free to provide whatever other examples you are comfortable presenting.
Let's now re-visit the questions we considered before this lesson. Have the students use the note-taker provided below to type and print their answers.
1. Should a country produce everything it wants? Why or Why not?
[No, a country should produce items for which it has a comparative advantage and trade for other items. If they follow this rule they can obtain more without working any harder.]
2. If Country A is better than Country B at producing everything, would Country A gain anything by trading with Country B?
[Yes, just because a country has an absolute advantage does not mean it should produce the item. A country should specialize in whatever it has a comparative advantage in.]
3. When a new home is built, why doesn't one contractor do everything: carpentry, electrical, plumbing and landscaping?
[Because people specialize in what they are good at. For example, while the electrician may be able to do plumbing he has a comparative advantage in electrical work. Instead of trying to do plumbing he should do more electrical work and pay a plumber to do the plumbing. Both contractors are better off in this scenario.]
This lesson demonstrates that LeBron James should specialize in the area that he has a comparative advantage (lower opportunity cost), as should Scotty. It also shows that James has an absolute advantage in both activities-- that is, he can do them both using less resources. In both examples, the resources are the same (time) and money is used to measure them. In the end, the gains from trade are tremendous-- both James and Scotty are much better off if the trade is made.
After students have taken this interactive assessment quiz, they should print their answers to submit.
1. If Britain has a comparative advantage over France in the production of cars, then...
A. the opportunity cost of producing cars in Britain is lower than in France. [ANSWER]
B. the opportunity cost of producing cars in Britain is higher than in France.
C. there are no gains from specialization and trade in cars between Britain and France.
D. only Britain will gain from specialization and trade in cars between Britain and France.
2. If people specialize in producing those goods for which they possess a comparative advantage, then the economy as a whole can produce a greater quantity of goods.
a. True [ANSWER]
3. The law of comparative advantage says that a person should produce a good if he or she...
a. has the greatest desire to consume that good
b. has the lowest opportunity cost of producing that good [ANSWER]
c. has an absolute advantage in a related activity
d. has a comparative advantage in a related activity
e. is equally good at producing this good as someone else is
4. John takes 10 minutes to iron a shirt and 20 minutes to type a paper. Harry takes 10 minutes to iron a shirt and 30 minutes to type a paper. Which of the following statements is correct?
a. Harry has a comparative advantage in ironing. [ANSWER]
b. Harry has a comparative advantage in typing.
c. Harry has an absolute advantage in typing.
d. Harry has an absolute advantage in ironing.
e. Neither can gain from specialization and exchange.
1. Have students brainstorm some goods and services in which the United States likely has a comparative advantage. Next, have the students list some goods and services the United States likely has a comparative disadvantage in producing. What nations would have a comparative advantage in these goods or services?
[The U.S. likely has a disadvantage in low skill labor intensive industries because of the high wages U.S. employees make. The U.S. likely has an advantage in activities requiring more formal education. The U.S. produces and outsources large quantities of services like legal, financial and consulting work.]
*Note: Data from the Bureau of Economic Analysis may be useful.
2. Have students research the U.S.'s major trading partners. Who are the major trading partners of the United States? What goods does the U.S. import and what goods does the U.S. export? Does the U.S. gain from trading with other nations? Why?
[Canada, China, Mexico; Imports- crude oil, medicinal, dental or pharmaceutical preparations, passenger cars; Exports- civilian aircraft, medicinal, dental or pharmaceutical preparations, semiconductors; yes, because "world price of a good is different from the price determined by the intersection of the domestic demand and the domestic supply."]
-The U.S. Census Bureau has monthly data on Top Trading Partners: May, 2010 , Suite101 lists the Top US Imports & Exports 2009 , and Wolfram Demonstrations Project shows and explains why the U.S. Gains from Trade .
“The activity itself is very good, The difficulty is when I selected the link for defining the terms, I had all types of ads that blocked the definitions and I could not "x" them out-very frustrating! EconEdLink: Thank you for the note -- we believe that we have adjusted this issue.”