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AEM2300 Lecture2 Spring 2009

AEM2300 Lecture2 Spring 2009 - BASIC DEFINITIONS Absolute...

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1 of Professor David Lee AEM 230 / ECON 230 BASIC DEFINITIONS Absolute advantage : producing a product more ( most) efficiently - e.g. at lowest absolute cost - compared to other countries or producers. Opportunity cost : the number of units of one good you must sacrifice to get one additional unit of another good. Comparative advantage : producing a good with lower or lowest opportunity costs of production. Specialization : the use of resources to produce some, but not all, goods required by society. Autarky : absence of trade; a no-trade equilibrium point Terms of trade : relative prices of a country’s exports and imports: P X /P M
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2 of Professor David Lee AEM 230 / ECON 230 ABSOLUTE ADVANTAGE Reaction to Mercantilism of late 18 th century England. Concept goes back to Adam Smith, The Wealth of Nations , 1776. “Labor theory of value”
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3 of Professor David Lee AEM 230 / ECON 230 ABSOLUTE ADVANTAGE “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither one nor the other…All of them find it for their interest to employ their whole industry in a way in which they have some advantage over neighbors, and to purchase with a part of its produce…whatever else they have occasion for. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of our own industry, employed in a way in which we have some advantage .
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