ECO100Y1 Lecture Notes - Opportunity Cost, Gumdrop, Comparative Advantage

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Topic 2 gains from trade (week two sep 20th sep 24th) Assume a society can only produce gumdrops and chocolates: Ppf of gumdrops and chocolates i production possibilities. Therefore ppf always bends outward. (mankiw study guide pg13-14: comparative advantage: An individual (or country) has a comparative advantage in an activity if the individual (or country) can perform that activity at a lower oc than anyone else. The existence of comparative advantage is the key to: specialization; b. The gain from trade e. g. 2 john and jane ii pp for john and jane ppf for john and jane. Observations: john has an absolute advantage in production of cloth (i. e. is more efficient in the production of cloth), jane has an absolute advantage in production of corn; (i. e. can produce corn using fewer resources); 2 4 corn iiii- oc of producing one unit of. John: oc per cloth = 2/10 = 0. 2 corn/cloth; Oc per corn = 10/2 = 5 cloth/corn;

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