WDW101Y1 Lecture Notes - Lecture 13: Spontaneous Order, Comparative Advantage, Opportunity Cost
03/03/2016
Invade or Trade? – Democratic peace (Shermer)
Key Terms:
Opportunity Costs Wasloonia can produce 10 phones OR 25 apples. It can’t produce both
• Therefore the “opportunity cost” of 10 phones is 25 apples. (You have to forego 25
apples if you want to produce 10 phones)
• 10 phones = 25 apples. 1 phone = 2.5 apples (Divide both sides by 10)
• Way to think about and place a value on trade-offs (what you’re losing if you don’t
pursue certain opportunities)
Comparative Advantage Way to compare opportunity costs
• Each state has something that they can produce at a lower OC than others
• Each state should specialize in the good that they have a comparative advantage in
• Wasloonia can produce 10 phones or 25 apples
• Provincia could produce 15 phones or 25 apples
• What is the OC of producing phones in each of these countries
• W: 1 phone = 2.5 apples
• P: 1 phone = 1.66 apples
• Which state has the lowest OC for producing phones?
• Provincia. Therefore it has the “comparative advantage of phones”
Law of Comparative Advantage
• Both states will be better off if, instead of each trying to produce both phones & apples,
each specializes in one and trades to acquire the other.
• A state should produce items with the lowest opportunity costs and then trade for other
items
• Provincia should produce phones, Wasloonia should produce apples, both should trade
with each other.
• States should specialize in their comparative advantage
• Key Term: Trade Specialization
• As states specialize, they become more efficient
• Trade specialization leads to greater dependence upon trading partners for important
goods
• If trade is necessary for survival states will not want to disrupt commercial ties
• War disrupts trade
• Trade specialization decreases the probability of war (trade mitigates conflict because
countries are dependent upon one another)
Under what conditions does trade lead to conflict?
• When states are trying to produce all the goods they need to survive
• This leads to competition for resources, territory and markets
Under what conditions does trade lead to peace?
• When states specialize
• Economic interdependence leads to cooperation
Studies show that the more a state trades, the wealthier it becomes
• There is also an inverse correlation between wealth and war: the wealthier a state is, the
less likely it is to go to war
Trading relationships create spontaneous order (cosmos) in the global arena
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Document Summary
Opportunity costs wasloonia can produce 10 phones or 25 apples. It can"t produce both: therefore the opportunity cost of 10 phones is 25 apples. (you have to forego 25. 03/03/2016 apples if you want to produce 10 phones: 10 phones = 25 apples. 1 phone = 2. 5 apples (divide both sides by 10: way to think about and place a value on trade-offs (what you"re losing if you don"t pursue certain opportunities) Therefore it has the comparative advantage of phones . If trade is necessary for survival states will not want to disrupt commercial ties: war disrupts trade, trade specialization decreases the probability of war (trade mitigates conflict because countries are dependent upon one another) Under what conditions does trade lead to conflict: when states are trying to produce all the goods they need to survive, this leads to competition for resources, territory and markets.