lec23 - Absolute advantage: TRADE When one country can...

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1 TRADE This lecture: The benefits of trade. Next lecture: Fiscal and monetary policy with imports and exports. 2 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. 3 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. 4 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. 5
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec23 - Absolute advantage: TRADE When one country can...

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