Monday, October 24, 2011

Comparative Advantage

Roch. has absolute advantage then Cornell at making wine.
Roch. has abs. advantage at making cameras too!

Who's More Efficient At Making Each Good?
Price = what is traded off to do something
-Who incurs smaller tradeoff at making each? What is sacrificed?

Rochester
Cornell
Cameras
5 cameras “cost” 10 wine
à 1 cam = 2 wines
Pc = 2 wines
4 cameras cost 3 wines
à 1 cam cost ¾ of wine
Pc = ¾ wine
Wine
10 wines “cost” 5 cameras
1 wine costs 2 cam
à Pw = ½ cam
à Pw  = 4/3 camera


--> Compare tradeoffs: Rochester students better at making wine; lowest opportunity cost per bottle of wine
Rochester has a "comparative advantage" in making wine over Cornell
-Ability to produce something w/ less sacrifice
-No producer can have comparative advantage at producing everything

Notice Cornell more efficient not because they can make more but because they can make it cheaper!
--> relative efficiency

Rochester
Cornell
Initial
10 wines
0 cameras
0 wines
4 cameras
Trade
3 wines to Cornell
3 cameras to Roch
Final
7 wines
3 cameras
3 wines
1 camera

Society is richer! Trade leads to economic sustainability. 
Get more without using more resources; more output for same input

How Able to Know If Exchange (trade) Makes Sense?
The cost is cheaper
-Willing to agree on price
-Sell for more than costs to make it and the consumer buys for cheaper than it costs him to make it
(Roch. realizes $$ to build camera, buys cheaper from Cornell; Cornell sells at higher price than it costs them to make it)
Relatively better at something because opportunity costs matter

Rochester exported/imported, consider exchange rate of wine & cameras
*Pay for imports w/ your exports*
-Better off if specialize & engage in global community
   -Self sufficiency is the road to poverty

Everyone worries about population; Fear that China will produce everything more cheaply
-->Imagine if it actually was reduced
1) impossible for country to be good at everything
2) function of relativity
   -what matters is not different in prices across countries, but the relative prices within a country
   -make whatever you're better at
   -policy that discourages exchange causes problems
3) Policy that restricts trade makes people poorer
   -fear: poor countries take all the jobs & everyone becomes poor
Free movement of goods makes us richer
4) Service jobs= more pleasant, pay more, safer..

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