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Gains from Specialization and Trade

Gains from Specialization and Trade. How do we compare and monitor productivity? What types of advantages can one have in productivity? How do you show productivity?. The setting. Two people are trapped on a desert island: Selkirk and Pirate Jack

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Gains from Specialization and Trade

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  1. Gains from Specialization and Trade How do we compare and monitor productivity? What types of advantages can one have in productivity? How do you show productivity?

  2. The setting • Two people are trapped on a desert island: Selkirk and Pirate Jack • The island has two main economic activities: gathering turnips and digging for clams • Should they work together or perform activities individually?

  3. Productivity—measure of efficiency in production of goods/services Shown as ratio of output to input (o/i=p) We can show productivity in a model: the PPC/PPF PPC—shows how much of two g/s can be produced in a given amount of time There are two types of advantages one can have in productivity: Absolute advantage—when someone can produce a g/s using fewer resources than another Comparative advantage—when someone can produce a g/s with a lower opportunity cost than another --regardless of aa, people can benefit from specializing in the activities where they had ca --idea of David Ricardo, 1817 (England) Comparing productivity

  4. Who has absolute advantage? How would we find comparative advantage?

  5. Showing PPCs • We already have productivity numbers for both S and PJ, but what if they want to produce a mixture of the two goods? • We can show this on a PPC • Selkirk can produce 20 c & 20 t per day (at point A) • PJ can produce 90 15 c & 90 t per day (at point B) • We can also calculate ca using the PPC (see next slide)

  6. Comparing OC shows each man’s ca Selkirk’s data on the PPC shows that for every 10 turnips, he gives up the opportunity to collect 10 clams. His OC is 1:1. Calculating Opportunity Cost with a PPC

  7. PJ’s data on the PPC shows that for every 30 turnips, he gives up the opportunity to collect 15 clams. His OC is 1 t: ½ clam and 1c: 2 t Who has the greatest ca for collecting turnips? PJ Who has the greatest ca for collecting clams? SELKIRK

  8. Benefits from comparative advantages • From the data, Selkirk should collect clams, while PJ collects turnips. Then, they could trade with each other. • But, would this trade benefit either of them?

  9. What helps determine a country’s comparative advantage? • Geography • Education • Wage levels • Technology • Even with no absolute advantages, countries can still be ahead by finding what they can produce to gain a ca and through trading

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