ECON 101 Lecture Notes - Lecture 1: Foreign Direct Investment, Comparative Advantage, Opportunity Cost
Lecture 01 - Introduction to International Trade
• Larger countries (geographically) have lower incentives to trade because their large
geographic size allows for regional specialization (finances in New York and agriculture
in California)
• Foreign Direct Investment: When a firm buys a foreign firm (creating a multinational
firm)
o Does FDI increasing “pull” trade up as well? Possibly!
• Principle of Comparative Advantage
o Every country has a given amount of resources to produce goods. To what goods
should the country devote its resources?
▪ Example: California can make either 100,000 computers or grow 10
million roses, or a mix of the two
▪ Mexico can make either 30,000 computers or grow 9 million roses, or a
mix of the two
▪ California is relatively more productive in computer manufacturing, and
Mexico is relatively more productive in rose growing
o Opportunity Cost: The cost of producing one good, measured in foregone output
of all other goods
▪ Example: The opportunity cost of California’s rose production is the
foregone output of computers
o Comparative Advantage: A country has comparative advantage in producing a
good if the opportunity cost of producing a good is lower in this country than in
other countries
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