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Chapter 2

01:220:300 Chapter Notes - Chapter 2: Absolute Advantage, Marginal Product, Offshoring

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A L E X Hohmann

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Trade and Technology: The Ricardian Model
Why do countries trade with each other?
Differences in the technology used in each country
Differences in the total amount of resources, including labor, capital, and land found in
each country
Land labor and capital are known as factors of production
Differences in the cost of offshoring
The proximity of countries to one another
Affects costs of transportation
Explains why Canada is the United States’ top trading partner overall
Free-trade area means the countries in the agreement put no restrictions on trade
Absolute advantage
When a countey has the best technology for producing a good, it has an absolute
advantage in the production of that good
Comparative advantage
The primary explanation for trade among countries
A country has a comparative advantage in producing those goods that it produces
best compared with how well it produces other goods
Marginal product of labor is the extra output obtained by using one more unit of labor
The straight line PPF is a feature of the Ricardian model and it follows from the
assumption that the marginal products of labor are constant
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