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Eg which country has an absolute advantage in

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E.g. Which country has an absolute advantage in producing computers? A: Producing one computer requires 125 labor hours in Japan but only 100 in the US. Therefore, the US has an absolute advantage in both! 2. Comparative Advantage : If countries focus their production on producing goods which have a lower opportunity cost then in other countries, then world output will increase. - Gains from trade arise from comparative advantage (differences in opportunity costs).
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- When each country specializes in the good in which it has a comparative advantage, total production in all countries is higher. The worlds “economic pie” is bigger, and all countries can gain from trade. - The same applies to individual producers (like the farmer or rancher in our book) specializing in different goods and trading with each other. E.g. Which country has the comparative advantage in computers? A: To answer this we must determine the opportunity cost of a computer in each country. The opportunity cost of a computer is: a) 10 tons of wheat in the US because producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat. b) 5 tons of wheat in Japan, because producing one computer requires 125 labor hours, which instead could produce 5 tons of wheat. So Japan has a comparative advantage in computers. Lesson: Absolute advantage is not necessary for comparative advantage! TWO MEASURES OF THE COST OF A GOOD 1. Two countries can gain from trade when each specializes in the good it produces at lowest cost. Therefore, the first measure is: Absolute advantage measures the cost of a good in terms of the inputs required to produce it. 2. Another measure of cost if opportunity cost . In our example, the opportunity cost of a computer is the amount of wheat that could be produced using the labor needed to produce one computer. In our example, the opportunity cost of a computer is the amount of wheat that could be produced using the labor needed to produce one computer. THE TERMS OF TRADE - Let us say that one computer trades for 5 tons of wheat. This means that in a deal between the US and Japan, that for each computer Japan sends to US, they will send back 5 tons of wheat. - Opportunity costs within the US: 1. 1 computer = 10 tons of wheat (with the same amount of labor this is what is produced). This means that the opportunity cost of 1 ton of wheat is 1/10 of a computer. - Opportunity costs with Japan: 1. 125 Hours= 1 Computer. 25 Hours= 1 Ton of wheat 1 computer = 5 tons of wheat Therefore the opportunity cost of 1 ton of wheat is 1/5 of a computer. Therefore. ..... 5W < 1C < 10W (one computer trades for between 5 tons of wheat and 10 tons of wheat) 1/10C < 1W < 1/5C This means that in the deal between the US and Japan prices will have to be set within this range. For example, the highest price the US would pay would be for 10W, because it would not make
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Eg Which country has an absolute advantage in producing...

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