Chapter 18 part 2 - Graphical Analysis of the Principle of...

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Graphical Analysis of the Principle of Comparative Advantage A. The basic principle of comparative advantage rests on differing opportunity costs of producing various goods and services. B. An example of comparative advantage is developed in Figure 35.1 and Table 35.1 comparing an imaginary example using the U.S. and Brazil, where the labor forces of the two countries are assumed to be of equal size. 1. Before trade, both nations are self-sufficient in wheat and coffee and produce at the levels shown in Figure 35.1. There are three important points to realize with regard to their production possibilities curves: a. Constant costs – the linear production possibilities “curves” assume constant opportunity costs (implying resources are perfectly substitutable). b. Different costs – Different resource mixes and technology generates different opportunity costs between the two nations. c.
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Chapter 18 part 2 - Graphical Analysis of the Principle of...

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