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ch2_3ed - Chapter 2 Comparative Advantage The Basis for...

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During a stint as a volunteer teacher in rural Nepal, a young economic naturalist employed a cook named Birkhaman, who came from a remote Himalayan village in neighbouring Bhutan. Although Birkhaman had virtually no formal education, he was spectacularly resourceful. His primary duties, to prepare food and maintain the kitchen, he performed with competence and dispatch. But he also had many other skills. He could thatch a roof, butcher a goat, and repair shoes. An able tinsmith and a good carpenter, he could sew, fi x a broken alarm clock, and plas- ter walls. On top of all that, he was a local authority on home remedies. Birkhaman’s range of skills was broad even by Nepalese standards. But even the least skilled Nepalese villager can per- form a wide range of services that most North Americans hire others to perform. The alternative to a system in which everyone is a jack of all trades is one in which people specialize in particular goods and services, and then satisfy their needs by trading among themselves. Economic systems based on specialization and the exchange of goods and services are generally far more productive than those with less specialization, and this is a large part of the reason why income per person in Nepal is less than 6 percent of that in Canada. Our task in this chapter is to investigate why exchange and specialization can increase economic output. In doing so we will explore why people choose to exchange goods and services in the first place, rather than having each person produce his own food, cars, clothing, shelter, and the like. We will focus first on trade between individuals and then discuss international trade. A major focus of this chapter is what economists call comparative advantage. Roughly, a person has a comparative advantage at producing a particular good or service, let’s say haircuts, if that person is relatively more efficient at producing haircuts than at producing other goods or services. We will see that we can all consume more of every good and service if each of us specializes in the activities at which we have a comparative advantage. Chapter 2 Comparative Advantage: The Basis for Exchange CHAPTER OUTLINE 2.1 Exchange and Opportunity Cost 2.2 Comparative Advantage and Production Possibilities 2.3 Factors that Shift the Economy’s Production Possibilities Curve 2.4 Comparative Advantage and International Trade
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EXAMPLE 2.1 This chapter will also introduce the production possibilities curve, which is a graphical method of describing the combinations of goods and services that an economy can produce. The development of this tool will allow us to see much more precisely how specialization enhances the productive capacity of even the simplest economy. 2.1 EXCHANGE AND OPPORTUNITY COST The scarcity problem (see Chapter 1) reminds us that the opportunity cost of spending more time on any one activity is having less time available to spend on others. As the following example makes clear, this helps explain why everyone
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