EC 201 Lecture Notes - Lecture 14: Outsourcing, General Agreement On Tariffs And Trade, World Trade Organization
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22 Mar 2018
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ECON 201 Lecture 18 Notes- Chapter 14: What is Economics?
Benefits from Specialization and Trade
●More beneficial to specialize and trade than try to be self sufficient
●
# Produced per Day
Opportunity Cost of
Shirts
Opportunity Cost of
Chips
Shirtville
108 Shirts
⅓ chips
3 shirts
36 Chips
Chipland
120 Shirt
1 chip
1 shirt
120 Chips
○Chipland: tradeoff is 1:1
○Shirtville can produce 3x as many shirts as chips (OC of 1 chip=3 shirts)
●Productions Possibilities Curve + Possible combos/tradeoffs
●
○Attempt to be self sufficient at points a and b
●Autarky- trying to be self-sufficient
●To figure out which good to specialize in, you have to choose the one with the lower
opportunity cost (comparative advantage)
●Note: absolute advantage doesn’t matter in trade
○Chipland has a lower opportunity cost in making chips than Shirtville does, so
they have a comparative advantage in chip making
○Shirtville has a lower opportunity cost in shirtmaking (⅓ vs 1), so they have a
comparative advantage, they should specialize in that
●Terms of trade- the rate at which units od one product can be exchanged for units of
another product
●The potential for mutually benefecial trade between the two countries is possible
because of willingness to pay exceeds willingness to accept
●Consumptions possibilities curve- a curve showing the combinations of 2 goods that can
be consumed when a nation specializes in a particular good and trades with another
nation (CPC)
●
○Chipland produces 120 chips + trades 40 for 80 shirts
○Shirtville produces 108 shirts and trades 80 of them for 40 chips
○Boths CPCs ? PPCs aka each nation has more options about how much to
consume