Macroeconomics
choicesandencouragestradethatallowscountriestoexchangethegoodstheyproducemosteffciently for those they don't produce as effciently. This conceptcontributestothefoundationofinternational trade and cooperation. ● Comparative advantage is a concept that highlights the idea that a country can produce something at an opportunity cost lower than anothercountry.Whenacountryspecializesand exchanges what it has a comparative advantagein,itwillbeneftfromconsumptionatapoint beyond the PPC. For example, suppose that countries A and B can both produce TVs and bikes. Country A foregoes 100 bikes to produce 200 additional TVs, whereas country B foregoes 80 bikes to produce 200 additional TVs. Recall the per unit opportunity cost: For country A, this means that for each additional TV produced, 0.5 bikes are sacrifced (whatislost/whatisgained=100/200),sotheopportunity cost of producing 1 TV = 0.5 bikes. For country B, this means that for each additional TV produced, 0.4 bikes are sacrifced (80/200), so the opportunity cost of producing 1 TV = 0.4 bikes. ⇒ Opportunity cost of producing TVs incountryB(0.4)<opportunitycostofproducingTVsin countryA(0.5);therefore,countryBissaidtohavecomparativeadvantageintheproductionof TVs. It should specialize in producing and exchanging TVs if compared to country A. Furthermore, it would be more effcient and cost-effective for country A to import TVs from country B rather than producing them locally. ● Specialization occurs when individuals, frms, or even countries focusonproducingaspecifc setofgoodsorservicesinwhichtheyhaveacomparativeadvantage.Byconcentratingonwhat they're good at, they can increase their effciency and productivity, ultimatelybeneftingfrom tradeandcooperationwithothers.Inthepreviousexample,countryBspecializesinproducing TVs because it does it more effciently and at a lower opportunity cost than country A. ● Trade or exchange involves the exchange of goods and services between individuals, businesses, or countries. It's driven by the differences in opportunity costs and comparative advantages.
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