ECON 1000 Lecture Notes - Lecture 9: Comparative Advantage, Opportunity Cost, Market Power
Document Summary
A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them. Pw = the world price of a good, the price that prevails in world markets. Country has a comparative advantage in the good. Under free trade, country exports the good. Under free trade, country imports the good. A small economy is a price taker in world markets: its actions have no affect on pw. Not always true - especially for the u. s. - but simplifies the analysis without changing its lessons. When a small economy engages in free trade, pw is the only relevant price: No seller would accept less than pw, because she could sell the good for pw in world markets.