3_an_example_of_international_trade__part_2_of_chapter_3_

3_an_example_of_international_trade__part_2_of_chapter_3_ -...

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International trade Assume Northland and Southland face the production possibilities for food and clothes shown in the accompanying table. All resources are used to produce food All resources are used to produce clothes Northland food 100 tonnes clothes 100 tonnes Southland food 200 tonnes clothes 100 tonnes
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Comparative advantage
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Comparative advantage Opportunity cost of producing one tonne of food All resources are used to produce clothes Northland 1 tonne of clothes 1 tonne of food Southland ½ tonne of clothes 2 tonne of food
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Production and consumption  before trade   food clothes Northland 50 tonnes 50 tonnes Southland 100 tonnes 50 tonnes world 150 tonnes 100 tonnes
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Production after trade   food clothes Northland 0 tonnes 100 tonnes Southland 200 tonnes 0 tonnes world 200 tonnes 100 tonnes
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Consumption after trade food clothes Northland 75 tonnes 50 tonnes Southland 125 tonnes 50 tonnes world 200 tonnes 100 tonnes
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Gains from trade  Before trade After trade Food tonnes Clothes tonnes
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Unformatted text preview: Food tonnes Clothes tonnes Northland 50 50 75 50 Southland 100 50 125 50 world 150 100 200 100 APPLICATIONS OF COMPARATIVE ADVANTAGE Dawn Key is a very successful businesswoman. She is also skilled in the domestic arts. Though she could clean her house in two hours , she prefers to hire a cleaning lady who spends five hours doing the same job. Though she is a skilled cook, she hires a caterer when she hosts a party. The caterer takes ten hours to prepare the food, whereas Ms. Key could do the same work in only six. Why do Ms. Key's actions make sense in terms of comparative Summary The gains from trade are based on comparative advantage, not absolute advantage . Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. The principle of comparative advantage applies to countries as well as people....
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