kf002 - 1 Ka-fu Wong University of Hong Kong Comparative...

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Unformatted text preview: 1 Ka-fu Wong University of Hong Kong Comparative Advantage: The Basis of Exchange 2 The Basis of Exchange Why do people exchange goods and services in the first place? Why is YAO Ming a top basketball player, Dr. WONG an instructor in a university, and Thomas FRIEDMAN a prominent writer? 3 Why not do everything on our own? Should Joe Jamail write his own will? Jamail is the most renowned trial lawyer in American History He is listed 195 on the Forbes list of the 400 richest Americans, with net assets over $1 billion. Should Ms. Wu Yi do her own household chores? W Y (  or  ) was one of four vice-premiers of the State Council of the People's Republic of China from 2003 - 2008. In 2007, Forbes magazine considers her the second most powerful woman in the world. She knows how to do household chores. Brief description and picture taken from http://en.wikipedia.org/wiki/Wu_Yi 4 Why not do everything on our own? Grow our own food 5 Why not do everything on our own? paint our own houses replace our own roofs? 6 Why not do everything on our own? We can all have more of every good and service if we specialize in the activities at which we are relatively most efficient. 7 Example 2.1 . Basis for exchange Paul is a house painter whose roof needs replacing. Ron is a roofer whose house needs painting. Although Paul is a painter, he also knows how to install roofing. Ron, for his part, knows how to paint houses. Should Paul roof his own house? Should Ron paint his own house? Paul Ron 8 Example 2.1 . Basis for exchange Time required by each to complete each type of job: Ron has an absolute advantage over Paul at both painting and roofing, which means that Ron takes fewer hours to perform each task than Paul does. Painting Roofing Paul 300 hrs 400 hrs Ron 200 hrs 100 hrs Should Ron do the roofing and painting jobs for both houses? 9 Example 2.1 . Basis for exchange Time required by each to complete each type of job: However, Paul has a comparative advantage over Ron at painting, which means that he is relatively more efficient at painting than Ron is . Painting Roofing Paul 300 hrs 400 hrs Ron 200 hrs 100 hrs 10 Comparative advantage and opportunity cost To have a comparative advantage at a task To have a lower opportunity cost of performing it (is the same as) 11 Example 2.1 . Basis for exchange For Paul, the opportunity cost of painting one house = the number of roofing jobs he could do in the same time....
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This note was uploaded on 07/29/2010 for the course ECON ECON1001 taught by Professor Ka-fuwong during the Summer '10 term at HKU.

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kf002 - 1 Ka-fu Wong University of Hong Kong Comparative...

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