ECON201, Maclachlan, Fall 2006 1

Comparative Advantage

Chapter 2

ECON201, Maclachlan, Fall 2006 2

Economic Principle

Trade between two parties makes both better off.

ECON201, Maclachlan, Fall 2006 3

What’s the alternative to trade?

David Thoreau

at Walden Pond.

ECON201, Maclachlan, Fall 2006 4

On a national level: autarky

A policy of national self-sufficiency and nonreliance on imports or economic aid.

ECON201, Maclachlan, Fall 2006 5

Mercantilism

A country should aim to run trade surpluses and increase its monetary assets.

ECON201, Maclachlan, Fall 2006 6

Adam Smith (1723-1790)

Critic of mercantilism.

Countries should specialize and trade.

Specialize where there’s an ABSOLUTE ADVANTAGE

ECON201, Maclachlan, Fall 2006 7

ABSOLUTE ADVANTAGE

A region has an absolute advantage if it takes fewer resources to produce a good there than elsewhere.

Coffee in Columbia.

Computer software in Silicon Valley.

ECON201, Maclachlan, Fall 2006 8

David Ricardo (1772-1823)

Theory of comparative advantage.

Even without an absolute advantage a region can trade to the benefit of all parties.

ECON201, Maclachlan, Fall 2006 9

Productivity Information

Time to update webpage.

Time to repair a bicycle.

Paula 20 minutes 10 minutes

Beth 30 minutes 30 minutes

ECON201, Maclachlan, Fall 2006 10

Productivity and Opportunity Cost

Time to update webpage Time to repair bike

Paula 20 minutes 10 minutes

Beth 30 minutes 30 minutes

Opportunity cost of webpage update

Opportunity cost of bike repair

Paula 2 bike repairs ?

Beth ? ?

ECON201, Maclachlan, Fall 2006 11

Productivity and Opportunity Cost

Time to update webpage Time to repair bike

Paula 20 minutes 10 minutes

Beth 30 minutes 30 minutes

Opportunity cost of webpage update

Opportunity cost of bike repair

Paula 2 bike repairs 0.5 webpage updates

Beth ? ?

ECON201, Maclachlan, Fall 2006 12

Productivity and Opportunity Cost

Time to update webpage Time to repair bike

Paula 20 minutes 10 minutes

Beth 30 minutes 30 minutes

Opportunity cost of webpage update

Opportunity cost of bike repair

Paula 2 bike repairs 0.5 webpage updates

Beth 1 bike repair 1 webpage update

ECON201, Maclachlan, Fall 2006 13

The Production Possibilities Frontier

ECON201, Maclachlan, Fall 2006 14

A Shift in the Production Possibilities Frontier

ECON201, Maclachlan, Fall 2006 15

Why some countries have been slow to specialize

In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family.

--Adam Smith, 1776

ECON201, Maclachlan, Fall 2006 16

Too much of a good thing?

http://www.youtube.com/watch?v=VTgeNw1guBs&mode=related&search

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