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Lecture 21

ECON 2023 Lecture 21: ECON 24-2

3 Pages

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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 - Opportunity-cost ratio - Mexico: 2V ▯ 1B - 2 ton of vegetables for 1 ton of beef Self-Sufficiency Output Mix - U.S. and Mexico= isolated & self-sufficient - =Each country chooses output mix on PPC Specializing Based on Comparative Advantage - ⭐ Comparative advantage= key whether nation gain/ loss fr
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