ECO102H1 Lecture 41: Lecture 41-Comparative Advantage and Gains from Trade

• School: UTSG
• Department: Economics
• Course: ECO102H1
• Professor: Jack Carr

Document Summary

Jane has comparative advantage in production of corn. Jane has absolute advantage in production of both cloth and corn (he can produce cloth at a lower opp cost, 0. 2 corn versus 0. 5 corn) Observation: john has comparative advantage in production of cloth. Assume trade ratio is 3 cloths for 1 corn. John and jane can consume combination of cloth and corn outside own ppf specializes in production/exports cloth specializes in production/exports corn. essential insight to why trade is beneficial to everyone. Observation: asterisks (examples) illustrate consumption bundles of cloth and corn outside the ppf of john and of jane www. notesolution. com. With trade, a country can consume outside ppf by specializing in the production of goods in which it has a comparative advantage. Domestic price < world price => country has comparative advantage and will export good. Domestic price > world price => country has a comparative advantage and will import good (remember: in perfect competition, price reflect costs of production)