ECO101H1 Lecture Notes - Textile Industry, Absolute Advantage, Comparative Advantage

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2 Jul 2011

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ECO101H1 Full Course Notes

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Outline: the gains from trade: individuals (omit j see micro) - consume outside ppf: the gains from trade: nations. - winners and losers: (weak) arguments against trade, tariffs; - two ways of expressing ppf: production possibilities (per week) Opportunity cost of producing one unit of : Overall gain: with trade, a country can consume outside its ppf by specializing in the production of goods in which it has a comparative advantage. A: look at which goods the country is importing and exporting. Domestic price < world price country has a comparative advantage and will export good; Domestic price > world price country does not have a comparative advantage and will import good; (remember: in perfect competition, prices reflect costs of production (p=atc) ) www. notesolution. com www. notesolution. com www. notesolution. com www. notesolution. com. Topical argument against free trade: will increase world output; Comment: with trade, can produce unchanged world output with fewer resources (more leisure time: promotes income inequality within countries.

Related Questions

If individuals A and B can both produce only goods X and Y, and A does not have a comparative advantage in the production of either X or Y, then we know

Select one:

A. A must-have lower opportunity costs of production for both goods.

B. B has an absolute advantage in the production of X and Y.

C. A and B have the same opportunity costs for X and for Y.

D. B has a comparative advantage in the production of both X and Y.

E. the gains from trade will be large but only in one direction.

mauvefrog275

Suppose that the U.S. and Brazil produce only two goods --- computer and coffee. The table below gives its production possibilities.

Computer Opp Cost Coffee Opp Cost

U.S.: 12 4

Brazil: 5 10

1. Draw the graphs of the production frontier for each country. Make sure that you level the diagram properly and indicate the name of the country under the graph.

2. What are the opportunity costs of producing each good in the two countries? List them in the table.

3. On which good each country has a comparative advantage?

4. Which country exports computers? Coffee?

5. What is the range of TOT in which only Brazil gains from trade?

6. What is the range of TOT in which only the U.S. gains from trade?

7. What is the range of TOT in which both countries gain from trade?

chocolatetiger413

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

ECO101H1 Lecture Notes - Textile Industry, Absolute Advantage, Comparative Advantage

ECO101H1 Full Course Notes

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