ECO 3111 Chapter Notes - Chapter 3: Comparative Advantage, Opportunity Cost, General Equilibrium Theory
11 Apr 2018
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Document Summary
Country has comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than other countries. Trade between two countries can benefit both countries if each country exports the goods in which it has a comparative advantage. Ricardian model international trade is solely due to international differences in the productivity of labor. Unit labor requirement number of hours of labor required to produce 1 unit of a good. When there is only one factor of production, the ppf is simply a straight line. When the ppf is a straight line, opportunity cost is constant. Supply is determined by the movement of labor to whichever sector pays the higher wage. The economy will specialize in the production if the relative price exceeds the opportunity cost. The economy will specialize in the other good if the relative price is less than the opportunity cost.
