Comparative Advantage ECON 22060-002
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This 3 page Class Notes was uploaded by Amy Turk on Friday May 20, 2016. The Class Notes belongs to ECON 22060-002 at Kent State University taught by Dr. Ludmila Leontieva in Spring 2016. Since its upload, it has received 7 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 05/20/16
COMPARATIVE ADVANTAGE ● economic systems based on specialization and the exchange of goods and services are generally far more productive than those with with little specialization ● production possibilities curve = graphical method of describing the combinations of goods and services that an economy can produce ● absolute advantage = if a person takes fewer hours to perform a task than the other person ● comparative advantage = if a person’s opportunity cost of performing a task is lower than the other person’s opportunity cost ● when two people (or two nations) have different opportunity costs of performing various tasks, they can always increase the total value of available goods and services by trading with each other The Principle of Comparative Advantage ● everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest ● together we can produce vastly more than if we all tried to be self-sufficient Sources of Comparative Advantage ● at individual level = inborn talent ● result of education, training, or experience ● at national level = differences in natural resources or differences in society or culture ● maximum production is achieved if each person specializes in producing a good/service in which he or she has the lowest opportunity cost Production Possibilities Curve ● graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good ● opportunity cost = loss over gain ● downward slope represents scarcity principle = because our resources are limited, having more of one thing means having less of another ● attainable point = any combination of goods that can be produced using currently available resources ● unattainable point = any combination of goods that cannot be produced using currently available resources ● inefficient point = any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of another ● efficient point = lies along the production possibilities curve ○ more or one good can be produced only by producing less of the other ● the gains from specialization grow larger as the difference in opportunity costs increase PPCs for a Larger Economy ● a bow-shaped PPC means that the opportunity cost of producing something increases as the economy produces more of it ● when resources have different opportunity costs, we should always exploit the resources with the lowest opportunity first ○ low-hanging fruit principle Factors That Shift An Economy’s PPC ● the PPC confronts society with a trade-off ● economic growth = outward shift in the economy’s PPC ○ results from increase in amount of resources, knowledge, or technology ● higher rates of saving and investment ● population growth ● improvements in knowledge and technology ● population density is an important precondition for specialization ● specialization has costs ● outsourcing = connotes having services performed by low-wage workers overseas ○ jobs in the US may be put in jeopardy ● the less rules-based a job is, the less vulnerable to outsourcing it is ● on the graph of a production possibility curve, the opportunity cost of the good on the horizontal axis is determined by the absolute value of the slope ● the opportunity cost of the good on the vertical axis = 1/slope ● a curve that becomes steeper as production of the good on the x-axis increases shows that as we produce more of something, the opportunity cost of producing that good increases ● economic growth is represented by an outward shift in a country’s PPC ● low population density limits specialization ○ makes trading harder ● free trade doesn’t guarantee that every person in each country will be better off ● as a population falls, a country’s total output will fall ● PPC = the maximum production of one good for every possible production level of the other good ● the slope of any PPC is negative ○ more production of one good = less production of the other ● trade will benefit both countries if each country has a comparative advantage in the traded product ● an increase in output per hour for any one good frees up resources that can be devoted to the production of other goods