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ECON 1B03 (520)

Chapter Three Economics

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Hannah Holmes

Chapter Three: Interdependence and the Gains From Trade Concepts (tested on) 1) Absolute advantage 2) Comparative advantage E.g.: Canada has 50,000 hours of labour available for production, per month  Producing one computer requires 100 hours of labour  Producing one ton of wheat requires 10 hours of labour Japan has 30,000 hours of labour available for production per month  Producing one computer requires 125 hours of labour  Producing one ton of wheat requires 25 hours of labour Without trade Canadian consumers get 250 computers and 2500 tons of wheat and without trade Japanese consumers get 120 computers and 600 tons of wheat Basic International Trade Terms Exports: Goods produce domestically and sold abroad to export means to sell domestically produced goods abroad Imports: Goods produced abroad and sold domestically to import means to purchase goods produced in other countries Absolute Advantage: The ability to produce a good using fewer inputs than another producer Canada has an absolute advantage in wheat: producing a ton of wheat uses 10 hours in Canada vs. 25 in Japan  Two countries can gain from trade when each specializes in the good it produces at lowest cost  Absolute advantage measures the cost of a good in terms of the input required t
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