PSCI231 Lecture Notes - Lecture 1: Poverty Reduction, Market Structure, Brm P57
24 Feb 2015
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Definition: a country is said to have a comparative advantage in production of x if opportunity cost of producing more x is lower in that country than in other countries. Implication of theory of comparative advantage: countries trade with each other because they are different. 8. 2. 2 comparative advantage, competitive advantage, and the exchange rate. Most obvious way to improve competitive advantage: lower costs directly by paying lower wages and lower taxes. Exchange rate: rate at which one currency can be exchanged for another. Refer to exchange rate as foreign currency price of a unit of domestic currency. Appreciation on exchange rate increases purchasing power of domestic currency on world markets. Increasing returns of scale reflected in downward sloping average cost curve. Average cost falls as output rises to some limit. Presence of increasing returns of scale is additional cause of international trade. If markets are perfectly competitive, then prices = marginal cost; therefore, prices are high if costs are high.
