ECON 203 Lecture Notes - Lecture 17: Comparative Advantage, Autarky, Opportunity Cost
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*chapter 3, but we skipped it until now. The production possibilities frontier (ppf: represents the maximum production capacity of a country. Trade can expand the ppf and make everyone better off. Comparative advantage: the ability to produce a good at a lower opportunity cost than the other producer. Gains from trade arise from comparative advantage. When countries specialize in the good in which they have a comparative advantage, total production in all countries is higher, the worlds economic pie is bigger, and all countries can gain from trade. This is also applicable at an individual level, with individual producers. Absolute advantage: the ability to produce a good using fewer inputs than the other producer. Recall: a closed economy does not interact with other economies in the world, and an open economy interacts freely with other economies in the world. Net exports (nx): also called trade balance, is equal to value of exports value of imports.