02 comparative advantage PPT

S consumption 12 computer 12 shirts production

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Unformatted text preview: computer + 6 shirts U.S. consumption : 12 computer + 12 shirts Production Possibility Frontier / Production Possibility Curve 24 × = 6 5 4 24 × Opportunity cost of 1 computer Mexico 6 Shirts United States computer Mexico's PPF The US' PPF 28 No Trade Production = Consumption 20 Consumption with trade 4 6 8 10 12 14 No Trade Production = Consumption 24 slope = − Shirts 8 10 12 14 Shirts 0 4 8 12 16 20 24 28 Shirts 20 1 6 Consumption with trade 16 12 slope = −1 8 4 0 4 8 12 16 20 24 28 15:49:02 22 Before trade: in Mexico: Total value of production = 1 × $300 + 6 × $100 = $900 Wage = $900 / 24 = $37.5 in the U.S.: Total value of production = 12 × $300 + 12 × $100 = $4,800 Wage = $ 4,800 / 24 = $200 Both countries are better off 1 6 Suppose that Pcomputer = $300 and Pshirt = 100: Consumption in the countries with Trade: 2 4 Mexico’s consumption : 1 computer + 9 shirts U.S.’ consumption : 13 computer + 13 shirts 21 3 2 15:49:02 1 computer 15:49:02 4 8 Suppose that the U.S. trades 1 computer to Mexico in return for 3 shirts. low-cost computer slope = −1 12 Mexico’s production : 0 computer + 12 shirts U.S. production : 14 computer + 10 shirts low-cost 1 Shirt 16 Suppose that now Mexico specializes completely by allocating all 24 units of its labor to shirt production, and the United States moves 2 units of its labor out of shirt production and into computers . 1/6 of a computer 15:49:02 1 6 With Specialization and Trade Opportunity cost of 1 Shirt 2 20 4 0 Country No Trade Production = Consumption 24 1 Opportunity costs of the productions in the countries: 0 slope = − 2 19 5 No Trade Production = Consumption 3 15:49:02 6 The US' PPF 28 = 1× computer Mexico's PPF Absolute advantage Productivity in the U.S.: 1× computer Shirts 23 After trade: in Mexico: Total value of production = 1 × $300 + 9 × $100 = $1,200 Wage = $1,200 / 24 = $50 in the U.S.: Total value of production = 13 × $300 + 13 × $100 = $5,200 Wage = $ 5,200 / 24 ≈ $216.7 15:49:02 24 4 internet photo “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. ….If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.” – Adam Smith the end 15:49:02 25 15:49:02 15:49:02 26 27 5...
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This document was uploaded on 03/06/2014.

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