ECON1101 Lecture Notes - Lecture 33: Comparative Advantage, Absolute Advantage, Opportunity Cost
ECON1101 Week 11 Lecture C
● Read chapter 29 “International Trade” esp. Pp 657 - 670. See wattle course page
for hyperlink to ANU library record.
● Comparative Advantage:
○ Suppose only 2 countries in world: Australia (AUS) and foreign (FOR)
○ Only 2 goods produced beef (1000s of kg) and textile (100s of m2)
○ Constant returns-to-scale production, i.e. constant MC of production
Australia
Foreign
Hours needed per output unit
Beef
30
60
Textiles
5
8
Wage
w
wf
Unit labour costs
Beef
30w
60wf
Textiles
5w
8wf
○ Australia is more efficient than foreign in producing both beef and textiles
○ Australia has an absolute advantage in both
○ But AUS even more productive at raising beef than at making textiles:
■ In beef, foreign takes 2x as long (60 hours/30 hours)
■ In textiles, foreign takes 1.6x as long (8/5 = 1.6)
● Opportunity cost or OC (w/o trade):
○ Australia: OC for beef is 30/5 = 6 units of textiles
○ Foreign: OC for beef is 60/8 = 7.5 units of textiles
○ Australia has a higher comparative advantage for beef thus has a lower
opportunity cost for beef
○ Australia: the OC for textiles is 5/30 = ⅙ = 0.167 units of beef
○ Foreign: the OC for textiles is 8/60 = 1/7.5 = 0.133 units of beef
○ Thus foreign has a higher comparative advantage for textiles thus has a lower
opportunity cost for textiles
○ Everyone has a comparative advantage over something
○ If they don’t trade with the other country there units of beef and textiles are
limited to what they can produce
● Production possibilities curve (w/o trade)
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Document Summary
See wattle course page for hyperlink to anu library record. Suppose only 2 countries in world: australia (aus) and foreign (for) Only 2 goods produced beef (1000s of kg) and textile (100s of m2) Constant returns-to-scale production, i. e. constant mc of production. Australia is more efficient than foreign in producing both beef and textiles. Australia has an absolute advantage in both. But aus even more productive at raising beef than at making textiles: In beef, foreign takes 2x as long (60 hours/30 hours) In textiles, foreign takes 1. 6x as long (8/5 = 1. 6) Australia: oc for beef is 30/5 = 6 units of textiles. Foreign: oc for beef is 60/8 = 7. 5 units of textiles. Australia has a higher comparative advantage for beef thus has a lower. Australia: the oc for textiles is 5/30 = = 0. 167 units of beef. Foreign: the oc for textiles is 8/60 = 1/7. 5 = 0. 133 units of beef.
