Topic 3- Comparative Advantage and Trade Flashcards
Who can trade help
Trade can make everyone better off!
Absolute advantage
Ability of one to produce more of a good//service than competitiors using the sam eamoutn of resources
COMPARISON on the basis of PRODUCTIVITY
Comparative Advantage
ability of one to produce good at LOWER opporutinty cost
COMPARISON on the basis of OPPORUTNITY COST
What are gains of trade and specialization base don
OPportunity cost, so comparative advantage!
How does comparative advantage work
When each individual works on speciaiilzng in a good ot produce!! trade can make everyone better off
How can trade make everyone better off
bc they obtain goods at a price lower thne their opportunity cost of that good
How to do the calculation table questions
- look at both goods, which one is being asked about in the question as one whole one?
- divide that # of goods to both the top an dbottom
- the central good should be 1 and the opp cost of producing that good should be a decimal of the other
How to determine who has comp adv in table questions?
The producer who gives up LESS of other goods to produce Good X has the smaller opportunity cost of producing Good X
said to have a comparative advantage in producing it.
How is it possible for no one to have comparative advantage
When both parties havet he same opportunity cost
How to determine at what price trade should occur for GOod X
Trade should occur for Good X at a point lower than ones’ opportunity cost for producing that own good
I buy 5 kg of paneer in exchange for 15 kg of milk, buying each paneer kg for 3 kgs of MILK! if my opp cost for producing own paneer is 4kg of milk, this is clearly a good deal :)
