EC 201 Lecture Notes - Lecture 14: Outsourcing, General Agreement On Tariffs And Trade, World Trade Organization

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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
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
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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 ( 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
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