Belief Trade is a zero sum game you can t have a winner without a loser Perspectives Mercantilist Thought 1500 1750 Belief Gold is wealth Adam Smith Challenged Mercantilist view in 1776 Wealth of Nations is NOT about gold Trade can be mutually beneficial David Ricardo Built upon Smith s perspective Provides a more general rule than Smith Modeling Comparative Advantage 2 regions Buena Vista and Muchas Agua 2 activities growing rice and growing coffee beans Specialize based on absolute advantage lowest absolute cost resources Specialize using comparative advantage lowest opportunity cost what you could have done instead Max Output Buena Vista Muchas Agua Rice 90 OR 180 OR Coffee Beans 120 90 In buena vista 4 days for rice 3 days for coffee 360 days of productive time In Muchas Agua 1 day for rice 2 days for coffee 180 days of productive time Max rice Max Coffee Tasks Production possibilities graphs Absolute advantage Opportunity costs Comparative advantage What do you recommend Why At first we assume autarky Autarky means no trade Autarky Consumption Total Consumption Buena Vista Muchas Agua Rice 45 AND 90 AND Coffee Beans 60 45 Total across board 135 105 Absolute advantage lowest absolute cost per unit cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Who is the fastest Who has to use less resources Rice BV in 4 days MA in 1 day Muchas Agua has the absolute adv in rice Coffee BV in 3 days MA in 2 days Muchas Agua has the absolute adv in coffee Why would they want to trade Opportunity Cost per unit Buena Vista Muchas Agua Look at slope Comparative Adv lowest opp cost Specialized Production Max Output Buena Vista Muchas Agua Autarky Coffee 105 pounds Autarky Rice 135 bushels Specialized Coffee 120 pounds Specialized Rice 180 bushels FREE TRADE Rice 4 3 pounds pound Coffee Beans bushel 2 0 bushels BV has comparative advantage in coffee should specialize in coffee MA has comparative advantage in rice should specialize in rice Rice 0 180 Coffee Beans 120 0
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