ECN 102 Lecture Notes - Lecture 8: Opportunity Cost, Comparative Advantage, Absolute Advantage
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Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. it requires the comparison of two or more goods. Japan has lower opportunity costs of producing computers and therefore has the comparative advantage in computers. Lesson: absolute advantage is not necessary for comparative advantage: a country can have an absolute advantage in all production but cannot have a comparative advantage in all that it produces. Gains from trade arises from comparative advantage (differences in opp. costs). When a country specialises in good(s) in which it has a comparative advantage, total production in all countries is higher: the world economic pie is bigger, and all countries can gain from trade. This applies to individual producers (like farmer and rancher) specializing in different goods and trading with each other. Argentina and brazil each have 10,00 hours of labour per month: same limited input.
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