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International economics

International economics. Factor availability Pugel Ch. 4. WEB. http://lehmannk.uni.hu/. Summary: absolute advantage. A country enjoys an absolute advantage over country B in the production of product X when

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International economics

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  1. International economics Factor availability Pugel Ch. 4

  2. WEB • http://lehmannk.uni.hu/

  3. Summary: absolute advantage • A country enjoys an absolute advantage over country B in the production of product X when • One worker in country A produces more units of X in one hour thanthat of in country B does. • One worker in country A needs less hours to make one unit of X than one worker needs in country B.

  4. Summary: comparative advantage • Country A enjoys a comparative advantage in the production of good X when • It has a relative advantage in labour productivity • bigger absolute advantage or • less absolute disadvantage • Assumption: 2 countries (A and B), 2 products (x and y)

  5. Summary: comparative advantage • Calculation (Px stands for labour productivity for x or output of x per hour): • Px/Py(A) > Px/Py(B) means that country A has a comparative advantage in producing x • PA/PB(x) > PA/PB(y) means that country A has a comparative advantage in producing x

  6. Factor availability • New assumptions: • Two factors (usually capital : K and labour : L) • Increasing marginal costs of production instead of constant marginal costs (Ricardo’s approach) • MRT (marginal rate of transformation) is not constant on the PPC curve (bowed) MRTyx = -Δy / Δx

  7. S1: MRTcw=-1W/C • S0: MRTcw=-2W/C • S2: MRTcw=-3W/C • In S1: to produce 1 unit cloth we pass up producing 1 unit of wheat • In S2: for 1 unit cloth we give up producing 2 units of wheat

  8. National level • Suppose that the market price of cloth in terms of wheat is 2 W/C. • If the opportunity cost of producing another unit of cloth is less than 2 W/C (S1) -> make more cloth • If the opportunity cost of producing another unit of cloth is more than 2 W/C (S2) -> make less cloth • If the opportunity cost of producing another unit of cloth is equal to 2 W/C (S0) -> right amount of cloth

  9. Budget constraint: Y=Pw · Qw + Pc · Qc

  10. National level, no trade

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