PSCI 152 Lecture Notes - Lecture 3: General Agreement On Tariffs And Trade, World Trade Organization, Absolute Advantage
31 May 2018
School
Department
Course
Professor
PSCI 152 | Lecture 03
Comparative Advantage
Suppose:
–U.S. grows 10 million roses
–Could produce 100,000 watches for same amount
•Opportuity Cost:
–Trade off in terms of goods produced
–10 mil. roses or 100k watches
Suppose:
– Ecuador makes 30k watches
– Could produce 10 mil. roses for same amount
Comparative Advantage
•Beefit of Trade:
–Increases world output (and consumption) when states produce in what they have a
comparative advantage
Definition
–Country has a comparative advantage in a good if the opportunity cost of producing the
good, in terms of other goods, is lower in that country than other countries
Ricardian Model- theory of comparative advantage
o Assumes
• 2 countries, 2 goods
• One factor of production, labor
• Constant opp. Cost
• No transportation costs
• Full mobility of labor
o Home Country production
• In autarky (without trade)
▪ 400 units of labor (10 workers, 40 hrs each)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Could produce 100,000 watches for same amount: opportu(cid:374)ity cost: Could produce 10 mil. roses for same amount. Increases world output (and consumption) when states produce in what they have a comparative advantage. Country has a comparative advantage in a good if the opportunity cost of producing the good, in terms of other goods, is lower in that country than other countries. Ricardian model- theory of comparative advantage: assumes, 2 countries, 2 goods, one factor of production, labor, constant opp. 240 labor units (e. g. 6 workers, 40 hours each) 12 labor units to make iphones(up to 20 iphones) 4 labor units to make shoes(up to 60 shoes) Opportunity cost (cid:894)si(cid:373)ilar to (cid:862)price(cid:863)(cid:895: (cid:862)price(cid:863) of 1 ipho(cid:374)e is 3 shoes, (cid:862)price(cid:863) of 1 shoe is 1/3 ipho(cid:374)e, absolute advantage. Foreign has an absolute advantage in both: 12 vs 25 units to make iphones, 4 vs 5 units to make shoes, comparative advantage. Cost= 3 shoes: home has a comparative advantage in shoes.
