Comparative_Advantage__Lesson_1_

Comparative_Advantage__Lesson_1_ - E.g., let X represent...

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1 Lesson 1 1 Prices in a Market Economy • Adam Smith’s “Invisible Hand” • Prices function as signals • Decoding prices Lesson 1 2 Relative Prices or Money Prices? $0.80 $20.00 Lesson 1 3 Relative Prices or Money Prices? One month of XM-Radio service is 25 times as expensive as one cup of yogurt The value of one month of XM-Radio service equals the value of 25 cups of yogurt
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2 Lesson 1 4 = Lesson 1 5 00 . 20 $ = X P 80 . 0 $ = Y P 80 . 0 $ 00 . 20 $ = Y X P P 80 . 0 00 . 20 = Y X P P 25 = Y X P P Lesson 1 6 …The price of (good) X is 25 times the price of (good) Y …The price of (good) X in terms of (good) Y is 25 We call the good by which the prices of other goods are measured the numeraire good
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3 Lesson 1 7 In this example, Yogurt was the numeraire That choice was arbitrary We could just as easily choose XM-Radio as numeraire Yogurt is 1/25 th as expensive as XM-Radio 25 1 00 . 20 $ 80 . 0 $ = = X Y P P Lesson 1 8 The measure of relative price does not depend on the units in which money prices are measured Easy to make cross-country comparisons in relative price despite differences in currencies Let “ X ”and“ Y ” represent any two goods
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Unformatted text preview: E.g., let X represent cars and Y represent automatic dishwashing machines Lesson 1 9 Country: USA England Currency: $ X P 18,000 $25,000 Y P 300 $500 Y X P P 50 500 000 , 25 = 60 300 000 , 18 = X Y P P 50 1 00 , 25 500 = 60 1 000 , 18 300 = 4 Lesson 1 10 When compared with England, cars (good X ) are relatively cheap in America Alternatively, we might say that automatic dishwashing machines (good Y ) are relatively expensive in America when compared with England These two statements are equivalent to each other Lesson 1 11 The Importance of Relative Prices We will see that cross-country differences in relative prices motivate a large share of world trade If relative prices are different across countries, trade among the countries can benefit all of them While all countries may benefit from trade, some individuals (people and businesses) within each country may be harmed...
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Comparative_Advantage__Lesson_1_ - E.g., let X represent...

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