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8/9/2019 384c4d6af02d4854d26d450c2b51b1e5_Chap 2 f 13.pptx
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Comparative Advantage
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What the Economy Does
Basic questions
What?
How?
For Whom?
Resource categories
Land natural resources limited in quantity
Labor-Human power Capital-created resources
ntrepreneurial talent-business s!ills
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3
Comparative Advantage &
the Production Possibilities Frontier
Absolute AdvantageAbility to produce at less cost
Comparative Advantage Relati"eAbility to produce at less cost
ased upon !pportunity Cost "#hat$s given
up%
eason 'or trade
eason 'or speciali(ation
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)
Production Possibilities CurveE*ample
+,-,
Ag .'g/ 0///
1/ 1//
02/ 2//
)/ )//
3/ //
)// /
Entries are combinations of maximum total output of goods in
the countryAdding80 units Ag in the US requires giving up200units of Mfg. ostAg! """""""" ! """""" Mfg#Ag$he opportunity cost of
Ag %&Ag'200#80
2.(
.e*
Ag .'g/ 0//
)/ 1/
1/ 2/
0/ )/
02/ /
// /
Canada
Ag .'g/ )//
2/ 3/
0/ )/
01/ 02/
)/ 1/
3// /
Plot each box of options on the Graph Below (3 lines)
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0 )00 200 *00 +00 (00 ,00 -00 800 000
200
+00
,00
800
)000
)200
)+00
Production Possibilities Curve
US
anada
Mexico
Agriculture
Manufacturing
4
United tatesPPC
CanadaPPC
MexicoPPC
%0/)000'
%80/800'
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2
pportunity ostalculations What is the opportunity cost o' ag goods in each
country5 m'g goods given up per aggood produced
!p cost o' Ag in +- 666666666666
!p cost o' Ag in .e*ico 666666666666 !p cost o' Ag in Canada 66666666666
Who has lo#est op cost "P%o' Ag 66666666
Who has comparative advantage "lo# cost% inmanu'acturing56666666666
7ence #ho should produce #hat i' some o' each isdesired5
+-66666666 .e*ico 6666666 Canada 666666
%)0001800'#8010' ! 2.( Mfg#Ag
%801,0'#%801+0'!0.( Mfg#Ag+00#*00 !).* Mfg#Ag
Mexico
US
Mfg Ag Either
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8
raphs Maximum utputptions
9!A:; 9raph total o' the three countries First< complete speciali(ation in m'g goods
-econd< let only low cost producero' ag gds
speciali(e in ag gds "country666666666%
=hird let only low cost producero' m'g gds
produce m'g goods, "country 666666666%
!ther t#o produce ag gds 666666666666666 :ast all three countries speciali(e in m'g gds,
Mexico
U.S.
anada and Mexico
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0 )00 200 *00 +00 (00 ,00 -00 800 000
200
+00
,00
800
)000
)200
)+00
Production Possibilities Curve
US
anada
Agriculture
Manufacturing
1
). 3a4e Mexico %lo5 costproducer' produce Ag
goods 2. Add anada %medium costproducer' producing Aggoods
Add US %high costproducer' producing Aggoods
Conclusion! Co"parative advantage causes the outward bow inthe #orld PPC
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1+ ) , )) ), 2) 2, *) *,0
(
)0
)(
20
2(
*0
Susan 2+c#)2n
$om ,c#2+n
Speciali6ed
7o Speciali6ation&oorly speciali6ed
oo9 Example7umbers changed to ma9e learer
#hirley $% C
&om $% '
#hirley ($'
&om ) C
Each produces
proportionalshare
-hirley
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0/
&roduction &ossibilitiesur4e
Mil9
omputers
:ne;cient
E;cient
Unattainable
$ncreasing %pportunit& Cost
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00
&& Shift >actors
hanges in =esources apital
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Application of omparati4eAd4antage
Sell#Export 5hat you ha4e a comparati4e ad4antagein
uy#:mport goods you ha4e a comparati4edisad4antage in
Should you gro5 your o5n foodD
Should you do your o5n D Ans5erF $t depends on opportunit& cost
:ncludes non1monetary elements
$rade a?ects di?erent indi4iduals#Brms di?erently :mport competitor hurt
onsumer of imports beneBts from lo5er cost
onsumer of exported good pays higher prices
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Chy#Chy 7ot Speciali6eD
&ro More output possible E;ciently using resources