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URI ECN 201 - Specialization and Comparative Advantage

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Econ 201 1st Edition Lecture 4Outline of Last Lecture I. Two-Variable Graphsa. Straight Lineb. Nonlinear Curvec. Tangent Lined. Calculating AreaII. Time Series GraphIII. Scatter DiagramIV. Pie ChartV. Bar GraphVI. Trade OffsVII. Economic growthOutline of Current Lecture I. Benefits of SpecializationII. Comparative Advantagea. TradeIII. Absolute AdvantageIV. PracticeCurrent LectureThe Benefits of Specialization-Problem: Susan can clean 12 driveways a day or wash 24 loads of dishes in a day, or any equal combination of the two. Linda can clean 8 driveways or wash 8 loads of dishes, or a combinationin between.Susan’s Opportunity Cost Linda’s Opportunity CostClean 1 Diveway Wash 2 dishes Wash 1 dishWash 1 Dish Clean .5 driveways Clean 1 dishComparative AdvantageThese 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.-A resource has comparative advantage if it has the ability to be better suited to the production of one good than another.Ex. Susan has a comparative advantage of washing dishes and Linda has a comparative advantage of cleaning driveways because those are the categories in which they sacrificeless.What Happens With Trade?Without… …Trade With… …TradeProduction ConsumptionProduction ConsumptionGainSusan DrivewayDishes31831802441911Linda DrivewayDishes4444804501-Linda and Susan each did the task that they specialized in and traded each other some of this for what the other person specialized in and ended up with more tasks accomplished than either could have done on their ownTheory of Comparative Advantage- It makes sense to produce the things you’re especially good at producing and buy from other people the things you aren’t as good at producing.-Question 1: Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a Chinese worker can produce 100 shirts or 10 computers. If these countries were open to trade, which country would export shirts? Computers?The Americans would produce computers and the Chinese would produce shirts becausefor each country, that is the item with the lowest opportunity cost when compared to eachother.Comparative Advantage vs Absolute Advantage-Absolute advantage: a country can produce more output per worker than other countries.-Don’t confuse absolute and comparative advantage!-One person or country can produce more of both goods doesn’t mean we’re better off without trade.-Pay attention to opportunity costs: It can explain the comparative advantages of both parties.Practice Question-England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. If England and Scotland decide to trade, which commodity will Scotland trade to England? And why?Answer: Scotland would trade sweaters to England because their opportunity cost for producing them (20 scones) is much lower than England’s opportunity cost for producingthem (50 scones), so they have the comparative advantage to making


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