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Do you know …

Do you know …. how to determine absolute advantage and comparative advantage? graph a straight-line PPF and find its function? determine the gains from trade?. The exercise. Refer to the table below. Determine the absolute advantage and comparative advantage of the listed countries.

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Do you know …

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  1. Economics

  2. Do you know … • how to determine absolute advantage and comparative advantage? • graph a straight-line PPF and find its function? • determine the gains from trade? Economics

  3. The exercise Refer to the table below. • Determine the absolute advantage and comparative advantage of the listed countries. • Graph both countries’ PPFs on one single diagram. Find the linear PPF functions. Country Production in one day Qx Qv U.S. 100 200 China 60 75 Economics

  4. 1. Determining absolute advantage & comparative advantage Country Production in one day Refer to the following table, determine the absolute and comparative advantage of the listed countries. Qx Qv U.S. 100 200 China 60 75 Absolute Advantage U.S. U.S. Why? 100 > 60 200 > 75 U.S. can produce more of good x than China. U.S. can produce more of good v than China. Economics

  5. 1. Determining absolute advantage & comparative advantage Country Production in one day Refer to the following table, determine the absolute and comparative advantage of the listed countries. Qx Qv U.S. 100 200 China 60 75 Comparative Advantage China U.S. Why? Calculate the opportunity costs (US) 1x = 2v > (China) 1x = 1.25v (US) 1v = .5x < (China) 1v = .8x China can produce good x with lower opportunity cost. U.S. can produce good v with lower opportunity cost. Economics

  6. 2. Graphs and functions of PPFs Qv What is the function of China’s PPF? What is the function of U.S.’s PPF? What is the slope of China’s PPF? What is the slope of the U.S.’s PPF? 200 U.S.’s PPF Slope = -2 Qv = -2 Qx + 200 75 China’s PPF Slope = -1.25 Qv = -1.25 Qx + 75 Economics O 60 Qx 100

  7. 3. Determining gains from trade Refer to the table below. For both countries, • plot their before-trade combinations N’s, and • plot their full-specialization combinations Z’s, based on their comparative advantage, (assuming that both countries completely specialize.) Country Consumption before trade Good x U.S. 40 China 20 Economics

  8. a. Plotting points on PPF’s Qv Z 200 N 100 N U.S.’s PPF China’s PPF Z Economics O 60 Qx 100

  9. b. Determining gains from trade For both countries, • plot their after-trade combinations T’s, assuming that: • the terms of trade is 1x = 3/2v, and • China would continue to consume same amount of x as before trade. Economics

  10. c. Plotting points on PPF’s Qv Z 200 T N 100 T N U.S.’s PPF China’s PPF Z Economics O 60 Qx 100

  11. Conclusions • Trade can make everyone better off. • Trade enables people and countries to specialize in what they do best and to consume more than they can produce. • In economic jargon, trade causes the consumption possibilities frontier to move outside of the production possibilities frontier. Economics

  12. Now you know … • how to determine absolute advantage and comparative advantage. • graph a straight-line PPF and find its function. • determine the gains from trade. Economics

  13. See You! Take Care! Economics

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