EC 201 Lecture Notes - Lecture 11: Comparative Advantage, Fundamental Interaction, Autarky

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20 Feb 2018

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Economics 201 lecture 11 international trade. States, so china has a comparative advantage in producing t-shirts: the opportunity cost of producing an airplane is lower in the united states than in. There would be a fair-trade coffee market and a non-fair-trade coffee market. Doesn"t it cost money to export things: in reality, yes, in this class, no. It costs the same amount to produce something no matter who buys it. This assumption doesn"t change the intuition behind anything but makes things simpler. Simple example: robinson crusoe: works 8 hours per day, can allocate this scare time to fish or pick coconuts. In one hour, you can catch 3 fish or pick one coconut. Opportunity cost of one more fish (in terms of coconuts) is how many coconuts you must give up to get one fish (1/3) If crusoe can"t trade with anyone, he is in autarky. Suppose for now, when in autarky, he consumes 12 fish and 4 coconuts.

Related Questions

6. According to the theory of comparative advantage in international trade, a country will export a good only if

a. It can produce it using less labor than other countries.

b. Its productivity is higher in producing the goods than the productivity of other countries in producing it.

c. Its wage rate in producing the good is lower than in other countries.

d. Its cost of producing the good, relative to other goods, is at least as low as in other countries.

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

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The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

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EC 201 Lecture Notes - Lecture 11: Comparative Advantage, Fundamental Interaction, Autarky

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