lecture notes_Chapter 3_1 - Chapter 3 Labor Productivity...

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Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model
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Agenda 1. Introduction 2. Assumptions 3. Production Possibility Frontier 4. Opportunity cost 5. Price and wage determination 6. Absolute advantage
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3-3 Introduction Theories of why trade occurs: Differences across countries in labor, labor skills, physical capital, natural resources, and technology Economies of scale (larger scale of production is more efficient) The Ricardian model (Chapter 3) examines differences in the productivity of labor (due to differences in technology) between countries.
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3-4 Comparative Advantage and Opportunity Cost The Ricardian model uses the concepts of opportunity cost and comparative advantage . The opportunity cost of producing something measures the cost of not being able to produce something else with the resources used.
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3-5 Comparative Advantage and Opportunity Cost (cont.) For example, a limited number of workers could produce either roses or computers. The opportunity cost of producing computers is the amount of roses not produced. The opportunity cost of producing roses is the amount of computers not produced.
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3-6 Comparative Advantage and Opportunity Cost (cont.) Suppose that in the U.S. 10 million roses could be produced with the same resources that could produce 100,000 computers. Suppose that in Colombia 10 million roses could be produced with the same resources that could produce 30,000 computers. Workers in Columbia would be less productive than those in the U.S. in manufacturing computers.
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3-7 Comparative Advantage and Opportunity Cost (cont.) Colombia has a lower opportunity cost of producing roses. The opportunity cost of 10 million roses in Colombia is 30,000 computers. The opportunity cost of 10 million roses in U.S. is 100,000 computers.
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Comparative Advantage and Opportunity Cost (cont.) The U.S. has a lower opportunity cost of producing computers. The opportunity cost of a computer in Colombia is 330 roses.
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This note was uploaded on 02/02/2012 for the course ECONOMICS 239 taught by Professor Wu during the Winter '11 term at Wilfred Laurier University .

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lecture notes_Chapter 3_1 - Chapter 3 Labor Productivity...

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