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Lecture 9

Lecture 9 - Development and Trade

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ECON 105
Eldar Sehic

Trade Opportunity Cost (OC): What must be sacrificed for extra production OC = What you lose/what you get Increasing OC: OC rises with extra production Example: C 10 8 5 0 1 2 3 T Constant OC: OC stays the same with extra production C 10 8 6 4 2 0 1 2 3 4 5 T Absolute Advantage (AA): Who can produce more Comparative Advantage (CA): Who can produce at lower OC Specialization: Based on CA Price for Trade: Found between opportunity costs for some good Example: Imagine 2 countries (X and Y) that can produce food (F) and clothing. X can make 12 F or 4 C. Y can make 10 F or 2 C. Country F C OC(F) OC(C) X 12 (or) 4 4/12 = 1/3C 12/4 = 3F Y 10 (or) 2 2/10 = 1/5C 10/2 = 5F Absolute Advantage (AA): X has AA in F (12 > 10) X has AA in C (4 > 2) Comparative Advantage (CA): Y has CA in F (1/5 < 1/3) X has CA in C (3 < 5) Specialization: Y specializes in F (making 10 food and 0 clothing) X specializes in C (making 0 food and 4 clothing) Price for Trade: Between 1C = 3F and 1C = 5F Such as: 1C = 4F Suppose, instead of trad
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