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Lecture

lecture 3

7 Pages
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Department
Economics
Course Code
ECO100Y1
Professor
Jack Carr

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Specialization
Individuals:produce one (or few) goods
Purchase many goods
Countries:Export goods
Import goods
Trade/exchange
Source of gains from trade/exchange:
Comparative advantage
Production possibilities frontier
(Constant Opportunity Cost)
Gumdrops Chocolates
10 0
8 1
6 2
4 3
2 4
0 5
1. Scarcity
2. Trade-off
3. Opportunity cost
1. Switch from all Gumdrops to all Chocolates
Opportunity cost = 10/5= 2 Gumdrops of one chocolate
2. Switch from all chocolates to all Gumdrops
Opportunity cost = 5/10 =0.5 Chocolates
Note:Straight-line (linear) PPF implies that these OC do not change along the PPF
ECO20100920
www.notesolution.com
Production possibilities Frontier
For an example of a Production Possibilities Frontier that is not linear, see Mankiw,
chapter 2, pg 26-28
For Simplicity
Assume constant OC
< = >
Straight-line PPF
COMPARATIVE ADVANTAGE AND THE GAINS FROM TRADE
Key Result
An individual (or country) has a comparative advantage in an activity if the
individual (or country) can perform that activity at a lower opportunity cost than anyone
else.
The existence of comparative advantage is the key to:
i.Specialization
ii.The gains from trade
Example #1
Production Possibilities (Per Week)
ClothCorn
John 10 2
Jane 8 4
John has absolute advantage in production of cloth (i.e., is more efficient in the
production of cloth)
Jane has absolute advantage in production of corn
PPF: John and Jane
ECO20100920
www.notesolution.com

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Description
Specialization Individuals: produce one (or few) goods Purchase many goods Countries: Export goods Import goods Tradeexchange Source of gains from tradeexchange: Comparative advantage Production possibilities frontier (Constant Opportunity Cost) Gumdrops Chocolates 10 0 8 1 6 2 4 3 2 4 0 5 1. Scarcity 2. Trade-off 3. Opportunity cost 1. Switch from all Gumdrops to all Chocolates Opportunity cost = 105= 2 Gumdrops of one chocolate 2. Switch from allchocolates to all Gumdrops Opportunity cost = 510 =0.5 Chocolates Note: Straight-line (linear) PPF implies that these OC do not change along the PPF ECO20100920 www.notesolution.com
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