101Comparative_Advantage - ( This concept was first...

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Comparative Advantage If one country is able to produce more of certain goods than another country, given that both countries have the same amount of input, it is not difficult to see who should specialize in what and that trading can be beneficial to one or both countries. (This is absolute advantage - Adam Smith ) What if one country is more productive than another country in ALL lines of production? Would it still be beneficial for both countries to trade? One perspective is to examine the differences in opportunity cost in the production of each product for each country.
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Unformatted text preview: ( This concept was first explored by David Ricardo – comparative advantage ). Example: Suppose the Marginal Rate of Transformation is constant for 2 countries, USA and BR. USA can produce 1000 cars or 1000 bb while BR can produce only 1 car or 40 bb. Since the respective opportunity cost for car ( and bb ) production is not equal, trade can still be viable and beneficial to both. In our simple example, it is best to assume zero transaction cost for now, ie, no tariffs, no taxes, no transportation cost etc....
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This note was uploaded on 12/16/2010 for the course ECON 101 taught by Professor Vanderwaal during the Fall '08 term at Waterloo.

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