kf002 - 1 Ka-fu Wong University of Hong Kong Comparative...

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Unformatted text preview: 1 Ka-fu Wong University of Hong Kong Comparative Advantage: The Basis of Exchange 2 The Basis of Exchange Why do people exchange goods and services in the first place? Why is YAO Ming a top basketball player, Dr. WONG an instructor in a university, and Thomas FRIEDMAN a prominent writer? 3 Why not do everything on our own? Should Joe Jamail write his own will? Jamail is the most renowned trial lawyer in American History He was once listed 195 on the Forbes list of the 400 richest Americans, with net assets over $1 billion. Should Ms. Wu Yi do her own household chores? W Y ( or ) was one of four vice-premiers of the State Council of the People's Republic of China from 2003 - 2008. In 2007, Forbes magazine considered her the second most powerful woman in the world. She knows how to do household chores. Brief description and picture taken from http://en.wikipedia.org/wiki/Wu_Yi 4 Why not do everything on our own? Grow our own food 5 Why not do everything on our own? paint our own houses replace our own roofs? 6 Why not do everything on our own? We can all have more of every good and service if we specialize in the activities at which we are relatively most efficient. 7 Example 2.1 . Basis for exchange Paul is a house painter whose roof needs replacing. Ron is a roofer whose house needs painting. Although Paul is a painter, he also knows how to install roofing. Ron, for his part, knows how to paint houses. Should Paul roof his own house? Should Ron paint his own house? Paul Ron 8 Example 2.1 . Basis for exchange Time required by each to complete each type of job: Ron has an absolute advantage over Paul at both painting and roofing, which means that Ron takes fewer hours to perform each task than Paul does. Painting Roofing Paul 300 hrs 400 hrs Ron 200 hrs 100 hrs Should Ron do the roofing and painting jobs for both houses? Opportunity cost Paul: Ron, can you help roof and paint my house? You can do both jobs faster than I do. Ron: Paul, I can help you with roofing only if you will help me with painting. Or, I can help you with painting only if you will help me with roofing. Paul: Why? Ron: Because . . . 9 10 Example 2.1 . Basis for exchange Time required by each to complete each type of job: However, Paul has a comparative advantage over Ron at painting, which means that he is relatively more efficient at painting than Ron is ....
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This note was uploaded on 02/05/2012 for the course FBE BUSI1007 taught by Professor Lin during the Spring '11 term at HKU.

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kf002 - 1 Ka-fu Wong University of Hong Kong Comparative...

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