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Lecture 14

ECON 2023 Lecture 14: ECON SI

3 Pages

Course Code
ECON 2023
Jeff Cooperstein

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Compa ra tive Advantage
- Abs olute a d va n ta g e = NOT n e c e s s a rily c o mp a rative a d va n ta g e
- Assumptions
2 nations
Sa me s ize labor force
Constant costs in e a ch country
Diffe re nt cos ts be tween countrie s
U.S. a bsolute a dva nta ge in both
- =U.S . ca n produce more for both goods than the othe r
- Opportunity cost ra tio
- Slope of the curve
- B sa crifice d pe r unit of producing A
- Calcula te opportunity cost for ea ch produce r (na tion)
[Exa mple 1]
- Opp o rtunity c o s t
- Ja y: 5/20= 1/4 (Give up 4 car to ge t one unit of la wn)
- Le a h: 3/15= 1/5 (Give up 5 car to ge t one unit of la wn)
J oy
Ca rs
La wns
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Comparative Advantage - ⭐Absolute advantage= NOT necessarily comparative advantage - Assumptions • 2 nations • Same size labor force • Constant costs in each country • Different costs between countries • U.S. absolute advantage in both - =U.S. can produce more for both goods than the other - Opportunity cost ratio - Slope of the curve - B sacrificed per unit of producing A - Calculate opportunity cost for each producer (nation) • [Example 1] - Opportunity cost - Jay: 5/20= 1/4 (Give up 4 car to get one unit of lawn) - Leah: 3/15= 1/5 (Give up 5 car to get one unit of lawn) • [Example 2] - International trade (Australia & Greece) - Opportunity cost - Greece: 4/6= 2/3 - Australia: 2/8= 1/4 - —> Each country concentrates on producing one product & import other goods= more
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