WDW101Y1 Lecture Notes - Lecture 13: Spontaneous Order, Comparative Advantage, Opportunity Cost

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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.

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