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Lecture 21

ECON 2023 Lecture Notes - Lecture 21: Absolute Advantage, Opportunity Cost, Comparative Advantage

Course Code
ECON 2023
Jeff Cooperstein

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Two Isolated Nations
Suppose world consists of 2 countries (U.S. & Mexico)
-Labor size of these 2 nations= equal
-Each nation can produce both beef & vegetable (@ different efficiency level)
3 Realities relating Production Possibilities curve (PPC)
Constant costs
-Straight line (constant to PP frontiers)
-=Assumption of constant costs (For simplify)
Different costs
-U.S. & Mexico= different resource mixes, technology
-=Different slopes of curves
U.S. Absolute advantage in both
-Beef: Mexico (10) < U.S. (30)
-Vegetable: Mexico (20) < U.S. (30)
-Same size of labor—> Output per worker= U.S. > Mexico
-[Graph] U.S. @ point A Mexico @ point Z
Opportunity-Cost Ration in U.S.
-U.S.= operate at some point ON production possibilities curve
The slope of the curve: 1
-= 1 ton of vegetables= sacrificed for each extra ton of beef
-Opportunity-cost ratio (Domestic exchange ratio)
-United States: 1V ! 1B
-1 ton of vegetable (V) for 1 ton of beef (B)
-Within borders, U.S. can exchange vegetable & beef
Opportunity-Cost Ration in Mexico
-The slope of the curve: 2
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