Lecture 3

Lecture 3 - ECN 211 Macroeconomic Principles...

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Unformatted text preview: ECN 211 Macroeconomic Principles L26-Specialization and Trade. Absolute Advantage … a trading advantage derived from one country having a absolute lower input cost of production • Country uses less scarce resources in the production of the good – For a given amount of inputs a country with an absolute advantage can produce more of a good compared to another country. Combination Tim Bob 1 20 Food 0 Bev 20 Food 0 Bev 2 15 Food 5 Bev 15 Food 2.5 Bev 3 10 Food 10 Bev 10 Food 5.0 Bev 4 5 Food 15 Bev 5 Food 7.5 Bev 5 0 Food 20 Bev 0 Food 10 Bev Collapsing the Production Possibilities Schedule Combination Tim Bob 1 20 Food 20 Food 5 20 Bev 10 Bev Absolute advantage • Food. – Neither person has an absolute advantage in the production of Food. – Both of them can produce 20 food. – Therefore they face the same input cost in the production of food. • Beverages – Tim has an absolute advantage in the production in Beverages – He can produce 20 Beverages while Bob can only produce 5 beverages – Hence Tim has a lower input cost per beverage. Absolute Advantage • In the 2 good, 2 country model a country can have, at most, an absolute advantage in both goods – Or one good or no goods! – Or one good or no goods!...
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This note was uploaded on 03/03/2010 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Lecture 3 - ECN 211 Macroeconomic Principles...

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