[ECON 503] - Final Exam Guide - Ultimate 52 pages long Study Guide!
29 Nov 2016
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Trade balance = value of exports - value of imports. Bilateral trade balance = value of exports to one country - value of imports from that country. Comparative advantage exists when a country has a lower opportunity cost of production than other countries. Absolute advantage is just a lower absolute cost of production. Eddie has absolute advantage in wine, percy has absolute advantage in cloth. Specialize and trade: eddie makes wine, percy makes cloth. Each will give 1/2 production to the other. Eddie gives up 1/2 yard of cloth to make 1 bottle of wine. Percy gives up 1 yard cloth to make 1 bottle wine. Eddie has the lower opportunity cost of producing wine. Eddie gives up 2 bottles of wine to make 1 yard of cloth. Percy gives up 1 bottle of wine to make 1 yard of cloth. Percy has the lower opportunity cost of producing cloth.
