03_Comparative_Advantage

03_Comparative_Advantage - 1 COMPARATIVE ADVANTAGE Intro to...

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Unformatted text preview: 1 COMPARATIVE ADVANTAGE Intro to Macro (ECON 0110) Torsten Jochem Comparative Advantage Outline 1. Opportunity Costs 2. Production Inputs 2 3. Production Possibility Frontier 4. The Theory of Comparative Advantage 5. Free Trade Comparative Advantage The Theory of Comparative Advantage b states that every agent (HH, firm, country,) should do what they can do best relative to the skills of the others. b It thereby supports 3 s free trade s division of labor b To talk about the Theory of Comparative Advantage, we need to first understand two concepts: s 1. Opportunity Costs (OC) s 2. Production Possibility Frontier (PPF) 4 Opportunity Costs b Opportunity Costs b The enjoyment or utility lost from the best alternative you forego. b Example 1: Going to college s Possible opportunity costs: s If working was your preferred alternative: Salary you couldve earned. s If travelling was your preferred alternative: The enjoyment derived from backpacking/travelling. 5 Opportunity Costs b Opportunity Costs b The enjoyment or utility lost from the best alternative you forego. ample 2: pening a business b Example 2: Opening a business s Possible opportunity costs: s The salary you could have earned if you had worked somewhere else. s The interests you could have received when investing your money somewhere else. s If you run the business in your own property, the rent you could collect if you rented it out instead. s Hence, if you start a business you should not only look at the profit as revenues explicit costs, but also include opportunity costs! 6 Opportunity Costs b Opportunity Costs b The enjoyment or utility lost from the best alternative you forego. ample 2: pening a business Economic profit vs. Accounting profit ccounting profit cash flows (revenues, expenditures); b Example 2: Opening a business s Possible opportunity costs: s The salary you could have earned if you had worked somewhere else. s The interests you could have received when investing your money somewhere else. s If you run the business in your own property, the rent you could collect if you rented it out instead. s Hence, if you start a business you should not only look at the profit as revenues explicit costs, but also include opportunity costs! Accounting profit = cash flows (revenues, expenditures); Information that you will find on a firms financial statement. Economic profit = a firms revenues minus the explicit and implicit (=opportunity) costs. In economics when costs & profits are used, it is always referring to economic costs and economic profits. 7 Opportunity Costs b Opportunity Costs b The enjoyment or utility lost from the best alternative you forego. ample 3 oing to a concert b Example 3 : Going to a concert b Any Questions to Opportunity Costs?...
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03_Comparative_Advantage - 1 COMPARATIVE ADVANTAGE Intro to...

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