Lecture 41-Comparative Advantage and Gains from Trade

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1 Aug 2010
School
Department
Course
Professor
Thursday, April 1st, 2010
Comparative Advantage and the Gains from Trade
Production Possibilities (per week)
Cloth
Corn
John
10
2
Jane
16
8
2SSRUWXQLW\&RVWRI3URGXFLQJ2QH8QLWRI«
Cloth
Corn
John
0.2 Corn
5 Cloth
Jane
0.5 Corn
2 Cloth
Observation: John has comparative advantage in production of cloth
(he can produce cloth at a lower opp cost, 0.2 corn versus 0.5 corn)
Jane has comparative advantage in production of corn
Jane has absolute advantage in production of both cloth and corn
John: specializes in production/exports cloth
Jane: specializes in production/exports corn
Assume trade ratio is 3 cloths for 1 corn
John and Jane can consume combination of Cloth and Corn outside own PPF
Æessential 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
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