Lecture Notes 9-14-09

Lecture Notes 9-14-09 - -5 Tons of wheat in Japan because...

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*Trade allows you to consume outside your PPF Absolute Advantage : The ability to produce a good using fewer inputs than another producer. -US has an absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the US vs. 25 labor hours in Japan -Producing one computer requires 125 hours in Japan and 100 hours in US -US HAS ABSOLUTE ADVANTAGE IN BOTH GOODS! So why does Japan specialize in computers? Why do both countries gain from trade? -Opportunity cost. -Two countries can gain from trade when each specializes in the good it produces at lowest cost. -Absolute advantage measures the cost of a good in terms of inputs required to produce it. Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer. Opportunity Cost of a Computer -10 tons in US because producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat.
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Unformatted text preview: -5 Tons of wheat in Japan because producing one computer requires 125 labor hours which instead could produce 5 tons of wheat. *So Japan has comparative advantage in computers.-Would not gain from trade if opportunity cost is same for both countries. Gains from trade arise from comparative advantage (different in opportunity costs) When each country specializes in the goods in which it has a comparative advantage, total production in all countries is higher, the world’s “economic pie” is bigger, and all countries can gain from trade. Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods and services Comparative advantage means being able to produce a good at a lower opportunity cost. Absolute advantage … ****Along a bowed out production possibilities frontier as more of one good is produced: “efficiency decreases”...
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