ECON 1051 1ST Edition Lecture 6 Outline of Last Lecture I. Comparative Advantage and TradeII. Determinates of Comparative Advantage III. Examples Outline of Current Lecture I. Specialization II. Example of Specialization Current LectureI. Specialization a. To determine what a country or firm should specialize in it is important to first look at opportunity cost b. Which ever country or firm has to give up less after figuring out opportunity cost that is what they should specialize inII. Example of Specialization a. Assume France and Germany both make wine and schnitzel. Despite Germany having the absolute advantage for both goods, they can only specialize in one while France specializes in the other b. First, look at opportunity cost: i. Assume France’s opportunity cost of making 1 bottle of wine is 2 pounds of schnitzel and their opportunity cost for making 1 pound of schnitzel is ½ a bottle of winii. Assume Germany’s opportunity cost of making 1 bottle of wine is 3 pounds of schnitzel and their opportunity cost for 1 pound of schnitzel is ½ a bottle of winec. Based off of the opportunity cost for each good, it can be determined which good each country should specialize in These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Since France has a lower opportunity cost for 1 bottle of wine (they only have to give up 2 pounds of schnitzel as opposed to Germany’s 3) they have the competitive advantage in wineii. Since Germany has a lower opportunity cost for 1 pound of schnitzel (they only have to give up ½ bottle of wine as opposed to France’s full bottle) they have the competitive advantage in schnitzel d. Trade Advantagesi. With France specializing their time in making wine and Germany in schnitzel and then trading with each other, both countries are able to reach points that would be outside their PPF
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