Interdependence & Gains from Trade by WQ64Ogg

VIEWS: 22 PAGES: 16

									Comparative Advantage

          Chapter 2




     ECON201, Maclachlan, Fall 2006   1
       Economic Principle


Trade between two parties makes
 both better off.




           ECON201, Maclachlan, Fall 2006   2
What’s the alternative to trade?
                           David Thoreau
                           at Walden Pond.




          ECON201, Maclachlan, Fall 2006     3
    On a national level: autarky
A policy of national self-sufficiency and
 nonreliance on imports or economic aid.




               ECON201, Maclachlan, Fall 2006   4
             Mercantilism
A country should aim to run trade surpluses
 and increase its monetary assets.




               ECON201, Maclachlan, Fall 2006   5
Adam Smith (1723-1790)
                       Critic of mercantilism.
                       Countries should
                         specialize and trade.
                       Specialize where there’s
                         an ABSOLUTE
                         ADVANTAGE




      ECON201, Maclachlan, Fall 2006              6
   ABSOLUTE ADVANTAGE
A region has an absolute advantage if it takes
 fewer resources to produce a good there
 than elsewhere.
Coffee in Columbia.
Computer software in Silicon Valley.



                ECON201, Maclachlan, Fall 2006   7
    David Ricardo (1772-1823)
Theory of comparative
  advantage.
Even without an absolute
  advantage a region can
  trade to the benefit of
  all parties.




                 ECON201, Maclachlan, Fall 2006   8
        Productivity Information
              Time to update                   Time to repair a
              webpage.                         bicycle.

Paula         20 minutes                       10 minutes


Beth          30 minutes                       30 minutes


              ECON201, Maclachlan, Fall 2006                      9
  Productivity and Opportunity Cost

        Time to update webpage           Time to repair bike

Paula   20 minutes                       10 minutes
Beth    30 minutes                       30 minutes


        Opportunity cost of              Opportunity cost of
        webpage update                   bike repair
Paula   2 bike repairs                   ?
Beth    ?                                ?


                     ECON201, Maclachlan, Fall 2006            10
  Productivity and Opportunity Cost

        Time to update webpage           Time to repair bike

Paula   20 minutes                       10 minutes
Beth    30 minutes                       30 minutes


        Opportunity cost of              Opportunity cost of
        webpage update                   bike repair
Paula   2 bike repairs                   0.5 webpage updates
Beth    ?                                ?


                     ECON201, Maclachlan, Fall 2006            11
  Productivity and Opportunity Cost

        Time to update webpage              Time to repair bike

Paula   20 minutes                          10 minutes
Beth    30 minutes                          30 minutes


        Opportunity cost of                 Opportunity cost of
        webpage update                      bike repair
Paula   2 bike repairs                      0.5 webpage updates
Beth    1 bike repair                       1 webpage update


                        ECON201, Maclachlan, Fall 2006            12
The Production Possibilities Frontier




           ECON201, Maclachlan, Fall 2006   13
A Shift in the Production Possibilities
               Frontier




           ECON201, Maclachlan, Fall 2006   14
  Why some countries have been slow to
              specialize

In the lone houses and
very small villages which
are scattered about in so
desert a country as the
Highlands of Scotland,
every farmer must be
butcher, baker and brewer
for his own family.
       --Adam Smith, 1776

                 ECON201, Maclachlan, Fall 2006   15
     Too much of a good thing?

http://www.youtube.com/watch?v=VTgeNw1
  guBs&mode=related&search=




             ECON201, Maclachlan, Fall 2006   16

								
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