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Lecture 4

ECON 1000 Lecture Notes - Lecture 4: Absolute Advantage, Comparative Advantage, Opportunity Cost

Course Code
ECON 1000
Paul Haddow

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Chapter 3: Interdependence and the gains from trade
Trade benefits all participants
not a “ zero-sum” game
effectively expands each person’s/country’s PPF( like technological progress in Chapter 2)
both countries benefit from trade at any “ agreed price” between their respective domestic
opportunity costs
a country’s share of benefits increases the closer the “agreed price” is to the other country’s
domestic opportunity costs
What drives trade?
absolute advantage: can produce good at lower input costs
- comparing producers ( people, firms, or countries)
comparative advantage: can produce good at lower opportunity cost
Comparative advantage:
determines who specializes/exports in what
“driver” for gains from trade
determined by country’s resource endowments: amount and type of land; climate;
infrastructure; stock of physical and human capital
even if a person or country has no absolute advantage, it always has a comparative
even if a person/country has an absolute advantage in producing both goods, it only has a
comparative advantage in one good because the opportunity cost of one good is the inverse
of the other
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