Chapter 3 - Introduction Comparative advantage and the...

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1 Comparative advantage and Comparative advantage and the Production Possibilities the Production Possibilities Frontier Frontier Tutional BBA BBA International Economics. International Economics. 2 Introduction International trade is driven by the existence of difference prices of goods in difference countries. Why are the price difference? Absolute advantage Î Some countries can produce goods at a lower price because labor in that country is more productive in producing that particular good. Comparative advantage Î Country have a comparative advantage in the production of goods where the opportunity cost of producing those good is low. However, we made an assumption in Ch2 that is not always realistic. 3 PPF and Constant Costs PPF shows the various combinations of two goods that a country can produce when all of a country’s resources are fully employed and used in their most efficient manner. By efficiency, we mean that the economy is producing a given mix of goods at the least cost given the current state of technology. Constant costs : the amount of a good, assumed to be unchanging, that a country must forego to produce each additional unit of another good. 4 PPF and Constant Costs Recall the table from Ch2. 10 M 50 C Gains from specialization and trade 40 M 100 C 50 M 150 C Domestic production and consumption without trade 50 M 100 C 50 M 200 C Consumption with trade 0 M 300 C 100 M 0 C Q at full employment India U.S.
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5 Production and Consumption with Specialization and Trade. U.S. Point B represent ... • Point C represent ... • The negative slope shows that both countries must give up machine to increase cloth, and vice versa.
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