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ECO100 - MAR 18

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James Pesando

Chap 32 - issues with Fiscal Policy =>Don’t have to know Gains from Trade for Individuals - ● Production Possibilities (Per week) Cloth Corn John 15 3 Jane 32 16 ● Jane has an absolute advantage over John ● We are worried about OC producing cloth and corn ● OC of producing one unit of Cloth Corn John 3/15 = 0.2 corn 15/3 = 5 cloths Jane 16/32 = 0.5 corn 32/16 = 2 cloths ● John has the comparative advantage in the production of cloth ○ lower OC when compared to jane ○ gives up less corn than Jane when he is producing ● Jane has the comparative advantage in the production of corn ○ she can produce corn at a lower OC than john ● Jane has the absolute advantage in the production of both cloth and corn ○ she can produce more cloth and more corn in any given week ● Trade ratio ● There are possible gains from trade whenever there is a comparative advantage ● Having a absolute advantage means that Jane may not completely specialize ● John will specialize in the production of cloth ○ exports cloth to Jane ● Jane will specialize in the production of corn ○ exports corn to John ● Assume the trade ratio is 3 cloths to 1 corn ○ Because of trade, John and Jane can consume beyond their PPF (production possibility frontier) ● The slope of the PPF is the OC of the thing on the x-axis ● The intercept of the PPF are the amount of cloth and corn produced when all resources are devoted to producing only one good ● The slope of PPF is the OC of the product on the x-axis ● Trade ratio is different from the OC, thats why CPF lies to the right ● The slope of the CPF is the trade ratio ● It pivots from the axis of comparative advantage ● The intercepts show how much can be consumed if only one good is consumed ● Jane cannot trade/consume bey
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