ECN 104 Chapter Notes - Chapter 3: Opportunity Cost, Absolute Advantage, Comparative Advantage
Document Summary
Illustrate the trade-off between producing two goods. Assumption: 2 countries and 2 goods, trade, consume, price at which countries would trade for, quantities of each good produced by each countries. Export: goods produced domestically and sold aboard. Import: good produced aboard and sold domestically. Absolute advantage: the ability to produce a good using fewer input than another producer (measure the cost of good) Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer (gain from trade) Total production in all countries increase when a country specialize in a good. Opportunity cost of good #1(x-axis good) is the slope of ppf. If one country has comparative advantage in one good, then other country has comparative advantage in the second good. Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods & services. Constricting the ppf (not in tb): in order produce good 1(x-axis good, for ex.