Comparative_Advantage__Lesson_3_

Comparative_Advantage__Lesson_3_ - Comparative Advantage...

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1 Lesson 3 1 Comparative Advantage and Trade Differences in autarky relative prices motivate trade Assume two goods ( X and Y ) and two countries (Home and Foreign) Lesson 3 2 Home in price Relative = H Y X P P Foreign in price Relative = F Y X P P Lesson 3 3 F Y X H Y X P P P P < Definition: Home has a comparative advantage in X and a comparative disadvantage in Y if and only if in autarky: In this case, it is also true that Foreign has a comparative advantage in Y and a comparative disadvantage in X .
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2 Lesson 3 4 2 1 = H Y X P P Fundamental result: In a competitive economy, each country exports the good for which it has a comparative advantage and imports the good for which it has a comparative disadvantage. Example: Suppose that autarky relative prices are as follows: 3 = F Y X P P Lesson 3 5 Good X is half as expensive as Y
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Comparative_Advantage__Lesson_3_ - Comparative Advantage...

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