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Eco 110-Week 2

by: Frankie Bjork

Eco 110-Week 2 ECO 110

Frankie Bjork
UW - L

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About this Document

These notes cover all of chapter three that will be important for our first exam.
Microeco & Pub Pol
Amena Khandker
Class Notes
Eco 110, Economics, Microeconomics
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This 2 page Class Notes was uploaded by Frankie Bjork on Thursday February 4, 2016. The Class Notes belongs to ECO 110 at University of Wisconsin - La Crosse taught by Amena Khandker in Spring 2016. Since its upload, it has received 22 views. For similar materials see Microeco & Pub Pol in Economcs at University of Wisconsin - La Crosse.


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Date Created: 02/04/16
Eco 110: 2/1-2/5 Chapter Three Interdependence  Absolute advantage: ability of a country to produce a specific good with fewer resources than other countries  Comparative advantage: ability of a country to produce a specific good at a lower opportunity cost than its trading partners Labor Hours Required To Produce One Unit United States (U.S.) United Kingdom (U.K.) Wheat 3 6 Cloth 6 8 *U.S. has an absolute advantage in producing both commodities as it needs less resources to produce them.  Opportunity cost (sacrifice) of producing one unit of Wheat (W) in the U.S. is: o 6 hours of labor (L)=1 Cloth (C) o 3L=1/2C OR o 1W=3/4 C  Whereas producing one unit of Wheat (W) in the U.K. is: o 8L=1C o 6L=6/8C or 3/4C OR o 1W=3/4C ›U.S. has the comparative advantage in Wheat (W) production as sacrifice of cloth is less.  Similarly, sacrifice of producing 1 unit of Cloth (C): o U.S.: 1C=2W; U.K.: 1C= 1 1/3W ›U.K. has comparative advantage in C as sacrifice of W is less.  The Principle of Comparative Advantage: a country should specialize in the production of and export the commodity of its comparative advantage and import the commodity of it comparative disadvantage Gain from Trade  Gain from Trade: increased consumption o TT=Terms of Trade: price of one good in exchange for other good  Examples of gains from trade: o Since the U.S. has the comparative advantage in producing W, and since the U.K. has the comparative advantage in producing C, they will produce only what they have the comparative advantage in after trade starts. o Using the previous table of labor hours required for W and C production, following is the result of production and consumption of W and C in both countries before and after trade. U.S.: Suppose 60 hours of labor, 30 for W, 30 for C; TT: 1W=2/3C Before Trade After Trade Production Consumption Production Consumption Wheat 10 10 20 10 Cloth 5 5 0 6 2/3 U.K.: Suppose 96 hours of labor, 48 for W, 48 for C; TT: 1W=2/3C of 2/3C=1W Before Trade After Trade Production Consumption Production Consumption Wheat 8 8 0 9 Cloth 6 6 12 6  From the table, before trade, U.S. has production and consumption of 10W and 5C with 60L (30 for W and 30 for C). After trade, U.S. produces only W, 20 units (with 60L); consume 10W and trade 10W to U.K. to receive 6 2/3C, 1 2/3 more than U.S. produced.  Similarly, before trade, U.K. has production and consumption of 8W and 6C with 96L (48 for W and 48 for C). After trade, U.K. produces only C, 12 units (with 96L), consume 6C and trade 6C with U.S., and receive 9W, 1 unit more than U.K. produced.  Gains of trade is that both countries increase consumption.  World production of W before trade was 18 (U.K. and U.S. combined). After trade, production of W increased to 20.  World production of C before trade was 11 (U.K. and U.S. combined). After trade, production of C increased to 12.  Other Benefits: o International transmission of ideas o Transmission of intellectual properties o Transmission of new processes


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