CompAdvEx - in wheat production (800 W, 0 O). Allow trade...

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COMPARATIVE ADVANTAGE EXAMPLE CALIFORNIA KANSAS ORANGES WHEAT ORANGES WHEAT 0 1000 0 800 100 800 50 600 (200 600 100 400 ) 300 400 150 200 400 200 200 0 500 0 Initial Allocation of Resources ( ) yields 300 Oranges and 1000 Wheat combined . What are “costs” in California ? Note that + 100 oranges results in - 200 wheat, Or 1 O = 2 W and 1 W = ½ O What are “costs” in Kansas ? Note that + 50 oranges results in - 200 wheat, Or 1 O = 4 W and 1 W = ¼ O California (Kansas) has a comparative advantage in producing oranges (wheat) and so assume that California specializes in orange production ( 400 O , 200 W) and Kansas
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Unformatted text preview: in wheat production (800 W, 0 O). Allow trade between these states to occur at the terms of 150 O = 400 W (which implies 1 O = 2.67 W and 1 W = .37 O ) After specialization and trade take place , potential levels of consumption are equal to 250 oranges , 600 wheat in California and 150 oranges , 400 wheat in Kansas. In both states combined , maximum consumption has risen to 400 oranges , 1000 wheat . This exceeds the initial output levels , indicating the EFFICIENCY GAINS from following the Principle of Comparative Advantage and Exchange !!!!!!!!!...
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