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microbook_3e-page24 - x Bill can only cut 5 logs a day or...

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Comparative Advantage This is one of the very few economic principles which is undeniably true, but is not obvious to intelligent people. x The US has a comparative advantage in the production of a good, if the opportunity cost of producing that good is lower in the US than it is in other countries. o Opportunity cost how much of one good you have to give up in order to gain more of another. o Unit labor requirement amount of labor needed to produce one unit of a good. Ex. If I type 2 pages of notes per hour, then my unit page hour 0.5 pages 2 hour 1 labor requirement (to type one page) is half an hour per page. x Countries gain from trade , x if they specialize in producing the goods x in which they have a comparative advantage , x although there may be distributional effects to consider. Comparative Advantage x Colleen can cut 12 logs a day or gather 10 bushels of food a day
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Unformatted text preview: x Bill can only cut 5 logs a day or gather 8 bushels a day Colleens opportunity cost x of cutting logs: log bushels 0.83 logs 12 bushels 10 bushels 10 day 1 logs 12 day 1 x of gathering food: bushel logs 1.2 bushels 10 logs 12 logs 12 day 1 bushels 10 day 1 Bills opportunity cost x of cutting logs: log bushels 1.6 logs 5 bushels 8 bushels 8 day 1 logs 5 day 1 x of gathering food: bushel logs 625 . bushels 8 logs 5 logs 5 day 1 bushels 8 day 1 x Colleen has a comparative advantage in cutting logs because her opportunity cost of cutting logs is less than Bills. x Bill has a comparative advantage in gathering food because his opportunity cost of gathering food is less than Colleens. Page 24...
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