ECON 1101 WEEK 2 LZ - Comparative Advantage: the Basis for...

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Comparative Advantage: the Basis for Trade Frank, Jennings, and Bernanke: Ch 2 and Ch 8 pp 204-210 1
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2 Outline Opportunity cost and specialisation The principle of comparative advantage Sources of comparative advantage The production possibility curve Factors that shift the production possibility curve Barriers to specialisation Production and consumption possibilities and the benefits of trade
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3 Opportunity Cost and Specialisation Specialisation as an alternative to a system in which everyone is a jack-of-all-trades Specialisation and exchange produce higher productivity Illustration: Should a top-flight patent lawyer write his own will?
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4 Opportunity Cost and Specialisation Absolute advantage: When one person is able to produce a good or service, or perform a given task, with less resources than another person. Comparative advantage: When one person’s opportunity cost of producing a good or service, or of performing a given task, is lower than another person’s opportunity cost.
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5 The Principle of Comparative Advantage Should Birkhaman collect his own firewood and repair his own shoes? Time to collect firewood Time to repair shoes Birkhaman 20 mins 10 mins Aadesh 30 mins 30 mins
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6 The Principle of Comparative Advantage Opportunity costs (O.C.) for Birkhaman and Aadesh? O.C of a bundle of firewood O.C of a shoe repair Birkhaman 2 shoe repairs ½ bundle of wood Aadesh 1 shoe repair 1 bundle of wood
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7 The Principle of Comparative Advantage The principle of comparative advantage applied Birkhaman has a comparative advantage in shoe repairs as he has a lower opportunity cost in this activity and should specialise in shoe repairs. Aadesh has a comparative advantage in firewood collection as he has a lower opportunity cost in this activity and should specialise in firewood collection.
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8 The Gains without Specialisation Bundles of firewood Shoes repaired Birkhaman 12 24 Aadesh 4 12 Total 16 36
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9 The Gains with Specialisation Bundles of firewood Shoes repaired Birkhaman 0 48 Aadesh 16 0 Total 16 48
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This note was uploaded on 07/28/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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ECON 1101 WEEK 2 LZ - Comparative Advantage: the Basis for...

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