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lecture notes feb 8

lecture notes feb 8 - February 8 2011 So far we covered o...

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February 8, 2011 So far we covered o Absolute advantage Patters and gains from trade o Comparative advantage Definition, how opportunity costs determine comparative advantage, and production possibilities frontier determine opportunity costs Comparative Advantage Review Book? o Consider again Vietnam and Japan, both of these countries produce two goods – rice and motorcycles. Assume that demand for rice and motorcycles in both Vietnam and Japan is such that these two goods are consumed in the same fixed proportions o Assumptions: Resource or technology conditions in Vietnam give it a PPF that is biased towards rice Resource or technology conditions in Japan give it a PPF that is biased towards motorcycles Where is slope flatter (motorcycles/rice) means that you get a lot of benefit in terms of rice, relative price of rice in Vietnam is lower, the opposite side is that it is lower in Japan for motorcycles, see slides demonstrating slope in curves Or relative price of rice is lower in Vietnam than in Japan, see autarky vs. non-autarky prices on slides International Trade o Absolute advantage concept can leave the impression that a country could lack an advantage in anything and therefore have nothing to export o An absolute disadvantage in a product does not preclude having a comparative advantage in that product Vietnam could have an absolute disadvantage in rice, but still export rice because of its comparative advantage, consider
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