ECON 2005 Lecture Notes - Lecture 32: Factor Endowment, Comparative Advantage, Opportunity Cost
Document Summary
We can get opportunity costs from the slopes of the ppfs. Law of comparative advantage= stats that the country that has the lower opportunity cost of producing a good should specialize in the production of that good. First we need to know the relative prices without trade. First note; if two countries trade with each other, relative prices have to be same in both countries b/c if cars more expensive in one country to another then people are going to buy where cars are cheap. Terms of trade ratio at which a country can trade domestic products for imported products. Or how much of one good can be exchanged for one unit of another good. Us now trade 1 computer to germany for 1 car, whereas if no trade the us would have to give up two computers to get a car. We can now draw a consumption possibilities frontier (cpf) which b/c of trade lies outside of ppf.
