Econ 1101 Week 2 PN - ECON 1101 Week 2 Comparative...

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ECON 1101 – Week 2 Comparative Advantage: the Basis for Trade Frank, Jennings, and Bernanke: Ch 2 and Ch 8 pp 204-210
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Outline • Opportunity cost and specialisation • The principle of comparative advantage • Sources of comparative advantage • The production possibility curve • Factors that shift the production possibility curve • Barriers to specialisation • Production and consumption possibilities and the benefits of trade
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Opportunity Cost and Specialisation • Specialisation as an alternative to a system in which everyone is a jack-of-all-trades • Illustration: – Should the CEO of a large bank clean her own house ? – (even if she can clean better than the cleaner)
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Opportunity Cost and Specialisation Absolute advantage: When one person is able to produce a good or service, or perform a given task, with less resources than another person. Comparative advantage: When one person’s opportunity cost of producing a good or service, or of performing a given task, is lower than another person’s opportunity cost.
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The Principle of Comparative Advantage • Should Birkhaman collect his own firewood and repair his own shoes? Time to collect firewood Time to repair shoes Birkhaman 20 mins (3 per hour) 10 mins (6 per hour) Aadesh 30 mins (2 per hour) 30 mins (2 per hour)
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The Principle of Comparative Advantage • Opportunity costs (O.C.) for Birkhaman and Aadesh? O.C of a bundle of firewood O.C of a shoe repair Birkhaman 2 shoe repairs ½ bundle of wood Aadesh 1 shoe repair 1 bundle of wood
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The Principle of Comparative Advantage • The principle of comparative advantage applied – Birkhaman has a comparative advantage in shoe repairs as he has a lower opportunity cost (1/2 firewood V 1 firewood for Adesh) – He should specialise in shoe repairs. – Aadesh has a comparative advantage in firewood collection as he has a lower opportunity cost • (1 shoe repairs V 2 for Birkhaman) – Adesh should specialise in firewood collection.
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• Assume an eight hour working day • The village demands 16 firewood
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This note was uploaded on 04/02/2012 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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Econ 1101 Week 2 PN - ECON 1101 Week 2 Comparative...

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