EC120 Lecture Notes - Deadweight Loss, Economic Surplus, Comparative Advantage
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EC120 Full Course Notes
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Country has comparative advantage if it produces good at lower opportunity cost than others. Countries gain from trade if each exports the goods in which it has comparative advantage. Pw = the world price of a good, the price that prevails in world markets. If pd < pw if pw < pd. Country has comparative advantage in good country doesn"t have comparative advantage. Under free trade, the country exports the good under free trade, country imports the good. A small economy is a price taker in world markets its actions have no effect on pw. Not always true, but simplifies the analysis. When an economy engages in free trade, pw is the only relevant price. No seller accepts less than pw, no buyer would pay more than pw. Cs = a +b cs = a. Ps = c ps = b + c + d.