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Chap_02 - 1 Chapter 2 Comparative Advantage The Basis for...

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Chapter 2 Comparative Advantage: The Basis for Exchange Purpose: Chapter 2 sets the stage for exchange and trade. It explains why trade is advantageous and the potential gains from trade and exchange. The chapter covers two major themes: comparative advantage and the production possibility curve. Both are essential to understanding the workings of a modern market-oriented economy. They are most often difficult concepts for a beginning student. Length: 23 pages Time required to read: At least two hours. The first half of the chapter – up to the sections relating to production possibilities – is very difficult. The sections after that are much easier to comprehend. Completing the exercises will require additional time. Number of lectures required for understanding: Two. One for comparative advantage and a second for the production possibility curve. Comparative advantage will require more time than the PPC. Summary: The chapter begins by suggesting that a proficient jack-of-all-trades certainly deserves our respect, but the family/community/nation would be more productive if he/she would channel the skill and energy into a single pursuit. Specialization is the key to development and progress, and specialization builds on persons having a comparative advantage in the production of one (or possibly a few) things. Joe Jamail, the famous trial lawyer, provides an example Comparative advantage is explained using two people and two products. The explanation is based on the opportunity costs faced by two individuals. The person whose opportunity cost is lower has the comparative advantage in producing a given product. Examples explain this notion. Absolute advantage and relative advantage are introduced as sub-themes. 1
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Comparative advantage should lead to specialization, which in turn should lead to a more productive society. Just how much more productive is shown using the production possibilities curve. The PPC is introduced for each of two persons and opportunity costs are calculated. Attainable, unattainable, and efficient combinations of goods are identified and defined. Straight line individual PPCs are used to show that specialization and exchange lead to increased productivity. Opportunity cost is used to make the points. A PPC for a "many person economy" is described and factors that can shift the position of an economy-wide PPC are explained. The chapter closes with brief discussions of comparative advantage and international trade. Outline: 1) Introduction 2) Exchange and Opportunity Cost a) The Principle of Comparative Advantage b) Sources of Comparative Advantage c) Recap 3) Comparative Advantage and Production Possibilities a) The Production Possibilities Curve b) How Individual Productivity Affects the Slope and Position of the PPC c) The Gains from Specialization d) A Production Possibilities Curve for a Many-Person Economy e) Recap 4) Factors that Shift the Economy's Production Possibilities Curve a) Why Have Some Countries Been Slow to Specialize?
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