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ECON 1P91 Lecture Notes - Lecture 13: Opportunity Cost, European Route E20, Absolute Advantage

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2 Dec 2016

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Brock University

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Marilyn Cottrell

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ECON 1P91 Full Course Notes

ECON 1P91 Full Course Notes

Document Summary

Specialize in one or few goods and trade. A country has an absolute advantage in all goods if it has greater productivity than another country in the production of all goods. Canada has an absolute advantage in the production of all goods than chile. Both # of bushels of green beans and grapes produces/day is greater in canada. Still gains available when a country or persons trades with another country or person. A country has a comparative advantage in producing a good if it can produce that good of a lower opportunity cost than any other country: no one better at producing everything, differing opportunity cost arise from differing. Magnitude of the slope of ppf measures opportunity cost of one good in terms of other. Without trade: a (cid:272)ou(cid:374)try"s produ(cid:272)tio(cid:374) a(cid:374)d (cid:272)o(cid:374)su(cid:373)ptio(cid:374) possi(cid:271)ilities differ. Slope of cpl common to both countries. Market demand = domestic demand + foreign demand. Market supply = domestic supply + foreign supply.

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Related Questions

If a country has a comparative advantage in the production of a good:

(i) it will not find trade beneficial because another country(ies) won't have a comparative advantage in other goods.

(ii) it must also have an absolute advantage in the good.

(iii) it can produce that good at a lower opportunity cost.

ceruleanlizard145

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

The fundamental force driving international trade is comparative:

A. Advantage: a country exports those goods that have high prices

B. Abundance: the country that produces more than it needs exports the good

C. Advantage: the country with the lower opportunity cost of production exports the good

D. Cost: a country trades with other countries that produce cheaper goods