ECON 366 Notes (09.03.2008)

ECON 366 Notes (09.03.2008) - Econ 366 Notes Wednesday,...

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Econ 366 Notes Wednesday, September 3, 2008 Chapter 2: Comparative Advantages of Regions Theoretical Principles of Interregional Firm Location Decisions - Principal of comparative advantage (David Ricardo, 18 th century) o If two regions differ in their RELATIVE abilities (cost of producing) two goods, the value of output is maximized if the region that is RELATIVELY BETTER AT (HAS A COMPARATIVE ADVANTAGE IN) specialized in producing that good Example: (see notes) o True even if the other region is better at producing the other good in ABSOLUTE terms Comparative advantage (CA) – (transport costs are barriers to comparative advantage) - A reason for trade between regions - Trade occurs if CA > transport costs - Scale economies in transport give rise to “trade between regions” rather than merely “trade between agents in different regions” Firm Locations When Regions Differ - Cost Considerations o Production Cost Oriented Firms: (textiles) Transport cost low relative to total cost (light in weight relative to value) Production process intensive in some input for which there is a geographic variation in cost (labor, energy) o Historical example: Textiles – light in weight relative to value and intensive in unskilled labor which is much cheaper in low-wage regions. Production moved from North to South when steam power freed it from water power requirements. More recently moved to developing countries. o Transport Cost Oriented Firms (steel, beer) Transport cost is large fraction of total cost – input or output is heavy relative to total value Interregional differences in input prices are relatively less important o Examples
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This note was uploaded on 09/26/2009 for the course ECON 366 taught by Professor Sengupta during the Fall '08 term at USC.

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ECON 366 Notes (09.03.2008) - Econ 366 Notes Wednesday,...

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