DJ, 2002 MAIR, IPE David Ricardo Comparative Advantage.

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Presentation transcript:

DJ, 2002 MAIR, IPE David Ricardo Comparative Advantage

DJ, 2002 Introduction z Differences between absolute and comparative advantage ySmith and Ricardo yInductive and deductive ySpecific and general

DJ, 2002 Comparative Advantage Wine Cloth Portugal Wine Cloth England E1E E2E

DJ, 2002 Opportunity Costs z England y? W in terms of Cl;? Cl in terms of W zPortugal y? W in terms of Cl;? Cl in terms of W

DJ, 2002 Specialisation z England should produce Cloth z Portugal should produce Wine z BUT yWhat if terms of trade are 10Cl for 2W? yWhat if terms of trade are 10Cl for 9W?

DJ, 2002 Terms of Trade z For both England and Portugal to gain from trade, the terms of trade must be between y 10Cl for 3W and y 10Cl for 8W

DJ, 2002 Gains from Trade z Before specialisation y England produced 21W and 30Cl y Portugal produced 80W and 50Cl y Total 1 101W and 80Cl z After specialisation y England produced 100Cl y Portugal produced 120W y Total 2 120W100Cl y Total 2 > Total 1