ECON 219 Lecture Notes - Lecture 9: Absolute Advantage, Comparative Advantage, Opportunity Cost
6 Feb 2019
School
Department
Course
Professor
ECON 219 verified notes
9/10View all
Econ 219
Lecture 9
5th February ā19
Ricardoās Example(check myCourses for question)
Answer-1.
Portugal has an absolute advantage in production of both because they produce both
wine and cloth with less amount of labor than it would take to produce the same amount in
England.
- Takes less unit labor requirements in Portugal to produce both wine & clothes
Answer-2.
(Show calculation), why each country has Comparative Advantage in something.
ENGLAND
- Opportunity Cost of cloth=100/120 =5/6 unit of wine/unit of cloth
- Opportunity Cost of wine=120/100 =6/5 unit of cloth/unit of wine
PORTUGAL
- Opportunity Cost of cloth=80/90 =8/9 unit of wine/unit of cloth
- Opportunity Cost of wine=90/80 =9/8 unit of cloth/unit of wine
We observe that 5/6<9/8
- Portugal possesses absolute advantage I producing cloth due to fewer labor hours
but England has comparative advantage in cloth due to lower opportunity cost.
Wine-
- Portugal has comparative advantage in wine production due to lower opportunity
cost in wine. (8/9<12/10)
Answer-3.
In the absence of trade, England requires 220 hours of work(100+120), Portugal requires
170 hours of work (80+90) to produce and consume the same quantities of wine and cloth.
However, England is more efficient at producing cloth than wine and Portugal is more
efficient in producing wine than cloth.
- If each country specializes in producing the good they have comparative advantage
in then the overall global production of both goods increases.
- England spends 220 hours to produce 2.2 units of cloth (1+1+20/100=2.2)
- Portugal spends 170 hours to produce 2.125 units of wine(1+1+10/80=2.125)
- If both countries specialize in the above manner and England trades a unit of cloth
for 5/6 to 9/8 units of Portugalās wine, England gains 0.295 units of wine compared to
domestic production (looses 0.83)
- Similarly, Portugal trades a unit of wine 8/9 to 12/10 of Englandās cloth. England
gains 1.2-0.89=0.31 units of cloth compared to domestic production.
Gain is at 2 levels
- You gain by employing resources efficiently
- You gain from trade
Autarky-when you donāt engage in trade, you close the borders & there is just domestic
production.
Chapter (4-6)
DIFFERENT TRADE MODELS B-MULTIPLE FACTORS, RESOURCES AND TRADE +
THE HECKSCHER-OHLIN MODEL
Introduction
Heckscher-Ohlin Model
ā¢ Trade occurs due to difference in labor, labor skills, physical capital, capital or other
factors of production across countries.
Trade is different when you have different factors, or factors in different ratios.
ā¢ Countries have different relative advantage of factors of production
(in order to produce its product relies heavily on labor, capital land)
ā¢ Production processes uses factors of production with different relative intensity.
(country doesnāt have the same fraction of each input)
Document Summary
Portugal has an absolute advantage in production of both because they produce both wine and cloth with less amount of labor than it would take to produce the same amount in. Takes less unit labor requirements in portugal to produce both wine & clothes. Answer-2. (show calculation), why each country has comparative advantage in something. Opportunity cost of cloth=100/120 =5/6 unit of wine/unit of cloth. Opportunity cost of wine=120/100 =6/5 unit of cloth/unit of wine. Opportunity cost of cloth=80/90 =8/9 unit of wine/unit of cloth. Opportunity cost of wine=90/80 =9/8 unit of cloth/unit of wine. Portugal possesses absolute advantage i producing cloth due to fewer labor hours but england has comparative advantage in cloth due to lower opportunity cost. Portugal has comparative advantage in wine production due to lower opportunity cost in wine. (8/9<12/10) In the absence of trade, england requires 220 hours of work(100+120), portugal requires.
