Chapter 3 Flashcards
Robinson Crusoe spends his time gathering coconuts and catching fish. Draw a PPF for it.
1/ Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself?
2/ Does he face the same limits if he can trade with natives on the island?
1/ If Crusoe lives by himself, this frontier limits his consumption of coconuts and fish.
2/ If he can trade with the natives, he will be able to consume at a point outside his PPF.
Absolute advantage
The comparison among producers of a good according to their productivity.
[The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good].
Opportunity cost
Whatever must be given up to obtain some item.
Comparative advantage
The comparison among producers of a good according to their opportunity cost.
[The producer who has the smaller opportunity cost of producing a good—that is, who has to give up less of other goods to produce it—is said to have a comparative advantage in producing that good]
Robinson Crusoe: gather 10 coconuts or catch 1 fish per
hour.
His friend Friday: gather 30 coconuts or catch 2 fish per hour.
1/ What is Crusoe’s opportunity cost of catching one fish? What is Friday’s?
2/ Who has an absolute advantage in catching fish?
3/ Who has a comparative advantage in catching fish?
1/ - Crusoe’s opportunity cost of catching one fish is 10 coconuts.
- Friday’s opportunity cost of catching one fish
is 15 coconuts.
2/ - Friday has an absolute advantage in catching fish:
+ Friday: 2 fishes per hour.
+ Crusoe’s: 1 fish per hour.
- Crusoe has a comparative advantage in catching fish since his opportunity cost of catching a fish < Friday’s.
Imports and Exports
Imports:
Goods produced abroad and sold domestically.
Exports:
Goods produced domestically and sold abroad.
Suppose that the world’s fastest typist happens to be
trained in brain surgery. Should he do his own typing or hire a secretary? Explain.
He should hire a secretary. He has an absolute advantage in typing, but a comparative advantage in brain surgery, since his cost in brain surgery is low compared to the opportunity cost for other people.
[The principle of comparative advantage states that each good should be produced by the country that has the smaller opportunity cost of producing that
good].
How absolute advantage and comparative
advantage differ.
Absolute advantage: The comparison among producers of a good according to their productivity.
Comparative advantage: The comparison among producers of a good according to their opportunity cost.
=> While producers may have an absolute advantage in
producing every good, they can’t have a comparative advantage in every good.
Give an example in which one person has an absolute
advantage in doing something but another person has a
comparative advantage.
Roger can:
- Make a fine meal in 10 mins
- Do the wash: 3 hours (180 mins)
Anita can:
- Make a fine meal in 20 mins
- Do the wash: 4 hours (240 mins)
1/ Roger has absolute advantages in making meals and doing all the wash.
2/ Anita’s the opportunity cost of 1 time of doing all the wash is 12 meals which is less than Roger’s => Anita has comparative advantage.
Should a country export or import goods it has a comparative advantage?
It should export the goods since it has a smaller opportunity cost of producing those goods. As a result, citizens of all nations are able to consume quantities of goods that are outside their PPFs.
Why do economists oppose policies that restrict trade
among nations?
Because trade allows all countries to receive the gains from comparative advantage. Restrictions on trade hurt all countries.
