ECON 2306 9 Trade

26 26 trade noteneitherislandhadanabsolute advantage

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Unformatted text preview: st for GI to produce them (1 radio for 1 hut instead of 1 radio for 3 huts). – And, SFR buys huts from GI for less radios than the opportunity cost for SFR to produce them (1 hut for 1 radio instead of 1 hut for 3 radios). 24 24 Trade Suppose GI trades SFR 30 huts for 30 radios. – Now, GI consumes their 30 remaining huts and the 30 radios they received from SFR. This is more than the 15 huts and 15 radios they consumed before trading. – SFR consumes their 30 remaining radios and the 30 huts they received from GI. This is more than the 15 huts and 15 radios they consumed before trading. 25 25 Trade Note the consumption after trade, GI and SFR each have more Huts and Radios than their resources allowed them to have if they did not trade. Ricardo’s Theory of Comparative Advantage – Specialization and free trade will benefit all trading partners, even those that may be absolutely more efficient producers. 26 26 Trade Note, neither island had an absolute advantage. Absolute Advantage – The advantage in the production of a pr...
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