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Unformatted text preview: Suppose to start that each country is producing a little of each good. I can assign labor within each country so total world supply of each good increases. Ex. 3 Home Foreign World Change in T-Shirts +2-1 +1 Change in Socks-6 +10 +4 Change in Labor L from S to T 1 L from T to S Comparative Advantage : The country with the lower opportunity cost of producing a good is said to have a comparative advantage in producing that good. The opportunity cost of the good on the x-axis is the slope of the PPF. The opportunity cost of the good on the y-axis is the inverse of the slope of the PPF. Another way of thinking about comparative advantage: Home has a comparative advantage in t-shirts if in autarky (Pt/Ps) H < (Pt/Ps) F . Allowing trade automatically generates forces that lead each country to re-allocate resources to produce more of the good for which it has a comparative advantage....
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- Spring '10
- International Economics