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Lecture

ECO100 - SEP 19

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Department
Economics
Course
ECO101H1
Professor
James Pesando
Semester
Fall

Description
COMPARATIVE ADVANTAGE AND THE GAINS FROM TRADE Example #2 Production Possibilities Cloth Corn John 10 2 Jane 16 8 Jane has absolute advantage in production of both cloth and corn. Question: Can Jane and John both still gain from trade? Opportunity Cost of Production One unit of: Cloth Corn John 0.2 Corn 5 Cloth Jane 0.5 Corn 2 Cloth Jane now has an absolute advantage in the production of both cloth and corn. Yet John has a comparative advantage in the production of cloth, while Jane has a comparative advantage in the production of corn. Observation: Jane is now twice as productive in production of cloth and corn as in Example 1 (where she could produce 8 cloth or 4 corn), so her opportunity cost of production each has not changed. Before trade, John and Jane divided their time equally between the production of cloth and corn. Production (Before trade) Cloth Corn John 5 1 Jane 8 4 Total 13 5 After trade, John specializes completely in the production of cloth, While Jane now allocates 75% of her time ot the production of corn. Production (After Trade) Cloth Corn John 10 0 Jane 4 6 Total 14(+1) 6(+1) Observation: 1. With unchanged resources (PPFs), total output is higher if trade allowed.THERE ARE GAINS FROM TRADE 2. If Jane allocates 100% of her time to corn, then (after tade) Cloth Corn John 10 0 Jane 0 8 Total 10 (-3) 8 (+3) If Jane specializes but not completely allocates her time to the production in which she has a comparative advantage, it demonstrates the gains from trade (higher output). - Used to demonstrate with unchanged resources, that trade will allow a higher total output ● Jane has absolute advantage in production of cloth and corn. Equivalently, she can product each good at a lower absolute cost than John ● Cost of production 1 cloth:1/16 week for Jane vs 1/10 week for John ● Cost of production 1 corn: ⅛ week for Jane vs ½ week for John. Economic Fallacy High-wage countries such as Canada cannot compete with low wage countries such as China
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