ECO 2117 Lecture Notes - Lecture 16: Factors Of Production, Factor Endowment, Comparative Advantage
20 Aug 2016
School
Department
Course
Professor
ECO2117
April 4 2016
International Trade: Trade Policies
-(slide 17 ppt. 8) USA has an absolute advantage in the production of both computers and
wheat
-in the US it takes 20x (100 divided by 5) as many hours to produce a computer as a ton of
wheat
-in Argentina, it takes 25x (200 divided by 8) as many hours to produce a computer as a ton
of wheat
-therefore, US has a comparative advantage in computers, Argentina has a comparative
advantage in wheat
-theory of comparative advantage (continued from March 31)
-suppose each country has 1000 units of labour
-if each country shares labour equally between computers and wheat, total production will
be 7.5 computers, 162.5 tons of wheat
-US: 5 computers, 100 tons of wheat
-Argentina: 2.5 computers, 62.5 tons of wheat
-if US reallocates 100 units of labour used in wheat to computers, it can produce one more
computer and 20 less tons of wheat
-if Argentina decreases its production by one computer, 200 labour hours become available
and the wheat production can increase by 25 tons
-thus, trade is beneļ¬cial because it allows countries to specialize in the production of goods
for which they have a comparative advantage
-factor endowment trade theory builds upon the theory of comparative advantage
-explains why countries produce the same goods at difference prices
-proposition 1: different products require different combinations of production factors
(labour ratio to produce one unit of output)
-proposition 2: countries have different endowments in production factors
-as a result, countries specialize toward capital or labour intensive products and trade,
producing the good they can make more cheaply
-theory predictions:
-world output is increased and all countries beneļ¬t from trading
-no full specialization (shifting production affects factor prices and thereby their opportunity
costs)
-equalization of world factor prices (as a result of equal world product prices), predict
declining international wage gap
-LDCs: higher share of labour income in GDP (wages rise since labour demand rises,
predicts that trade leads to more equal income distribution within country)
-Trade stimulates economic growth (consumption moves beyond production possibilities
frontier)
-theoretical answers to the 5 questions (slide 9)
-trade stimulates economic growth
-trade promotes greater equality by equalizing factor prices
-trade stimulates development of sectors that have comparative advantages
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
8) usa has an absolute advantage in the production of both computers and wheat. In the us it takes 20x (100 divided by 5) as many hours to produce a computer as a ton of wheat. In argentina, it takes 25x (200 divided by 8) as many hours to produce a computer as a ton of wheat. Therefore, us has a comparative advantage in computers, argentina has a comparative advantage in wheat. Theory of comparative advantage (continued from march 31) Suppose each country has 1000 units of labour. If each country shares labour equally between computers and wheat, total production will be 7. 5 computers, 162. 5 tons of wheat. Us: 5 computers, 100 tons of wheat. Argentina: 2. 5 computers, 62. 5 tons of wheat. If us reallocates 100 units of labour used in wheat to computers, it can produce one more computer and 20 less tons of wheat.
