Comparative_Advantage__Lesson_9_ - Absolute Versus...

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1 Lesson 9 1 Absolute Versus Comparative Advantage In this lesson we start with the same example we used to illustrate the global gain from trade in order to illustrate the difference between comparative and absolute advantage Comparative advantage is defined by a cross- country comparison of opportunity costs, and determines the pattern of trade Absolute advantage is defined by a cross-country comparison of productivity, and relates to a country’s standard of living Lesson 9 2 Start by defining productivity and show how the standard of living relates to productivity Consider a single country that can produce two goods ( X and Y ) with one input (labor) Suppose that it takes 4 workers to produce a unit of X , and 8 workers to produce a unit of Y Lesson 9 3 Equivalently, each worker can produce one quarter unit of X or one eighth unit of Y
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2 Lesson 9 4 If the economy has 800 workers, the PPF looks like this: X Q Y Q 100 200 Lesson 9 5 An increase in productivity is defined as an increase in the amount of output that each worker can produce Equivalently, an increase in productivity is
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Comparative_Advantage__Lesson_9_ - Absolute Versus...

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