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Unformatted text preview: 1 2. Comparative Advantage and Production Possibilities Comparative advantage: the basis for exchange What do you think? Do the Nepalese perform their own services because they are poor or are they poor because they perform their own services? Should a top-flight patent lawyer, Bill, write his own will if he can write the will in half the time that a solicitor would take? Exchange and opportunity cost 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 persons opportunity cost of producing a good or service, or of performing a given task, is lower than another persons opportunity cost. The Law of Comparative Advantage The individual (or country) with the lowest opportunity cost of producing a particular good should spee in producing that good. Exchange and opportunity cost Sources of comparative advantage Individual Inborn talent Education Training Experience National level Natural resources Culture, religion, history Education, training and experience A parable for the modern economy Imagine life in the Amazon Only two goods (fish and berries) Only two people (Matt and Jenna) What should each person produce? Why should they spee and trade? 2 Self-sufficiency (no trade) With self-sufficiency (i.e. ignoring each other): Each consumes what they produce Aggregate (Matts + Jennas combined) output is less than with speation and trade Self-sufficiency Suppose Matt and Jenna each work a 10 hour day, either fishing or picking berries. If Matt fishes all day, he can catch 10 fish (1 fish an hour). If he picks berries all day, he can pick 20 baskets (2 an hour). If Jenna fishes all day she can catch 5 fish (1/2 a fish an hour, or 1 fish every 2 hours). Or she can spend all day picking berries and end up with 15 baskets of them (3/2 an hour, or 3 every 2 hours)....
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