lec23slides - TRADE This lecture: The benefits of trade....

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3 TRADE This lecture: The benefits of trade. Next lecture: Fiscal and monetary policy with imports and exports. 8 Absolute advantage: When one country can produce a good more cheaply than another. Example: With 1 acre, 1 tractor, 2 workers: US can produce 100 bushels of wheat. New Zealand can produce 80 bushels. US has an absolute advantage over New Zealand in the production of wheat.
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12 When two countries have mutual absolute advantages, both countries will benefit from trade. Example: US has absolute advantage in wheat. NZ has absolute advantage in sheep. Both countries gain by specializing in one product and trading for other product. 17 COMPARATIVE ADVANTAGE US Iceland Wheat per acre 100 30 Sheep per acre 50 30 US has absolute advantage in both goods. US Iceland Cost of sheep in terms of wheat 2 1 Cost of wheat in terms of sheep 1/2 1 Iceland: comparative advantage in sheep. US: comparative advantage in wheat.
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20 Comparative advantage: When the amount of good X that must be given up to produce 1 extra unit of good Y
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This note was uploaded on 11/28/2010 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec23slides - TRADE This lecture: The benefits of trade....

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