ECON201, Maclachlan, Fall 2006 2
Economic Principle
Trade between two parties makes both better off.
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 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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