Comparative advantage and Opportunity Cost(cont A country faces opportunity costs when it employs resources to produce goods and services For example, a limited number of workers could be employed to produce either wine or cheese The opportunity cost of producing wine is the amount of cheese not produced The opportunity cost of producing cheese is the amount of wine not produced a country faces a trade off: how much wine or cheese should it produce with the limited resources that it has?
6 Comparative Advantage and Opportunity Cost (cont.) • A country faces opportunity costs when it employs resources to produce goods and services. • For example, a limited number of workers could be employed to produce either wine or cheese. – The opportunity cost of producing wine is the amount of cheese not produced. – The opportunity cost of producing cheese is the amount of wine not produced. – A country faces a trade off: how much wine or cheese should it produce with the limited resources that it has?
Comparative Advantage and Opportunity Cost (cont A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries A country with a comparative advantage in producing a good uses its resources most eficiently when it produces that good compared producing other goods
7 Comparative Advantage and Opportunity Cost (cont.) • A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries. • A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to producing other goods
Production possibilities frontier Unattainable Attainable 它日 …………… 0 5 wine(millions of bottles per ngonth)
8 Production Possibilities Frontier Attainable Unattainable wine (millions of bottles per month) 0 1 2 3 4 5 5 10 15 a b c d e f z
An Example China can produce 4, 000 wine/hour or Can produce 1, 333 cheese/hour Opportunity cost o c. of 1 cheese is 3 wine of 0 C. 1 unit of wine is 0.333 cheese One one wine cheese China 1/3 3 wine · Montenegro cheese can produce 1, 333 wine/hour or can produce 4,000 cheese/hour Montenegro 3 1/3 wine o c of 1 cheese is 0.333 wine cheese oC of 1 unit of wine is 3 cheese
9 An Example • China – can produce 4,000 wine/hour or – Can produce 1,333 cheese/hour – o.c. of 1 cheese is 3 wine – o.c. 1 unit of wine is 0.333 cheese • Montenegro – can produce 1,333 wine/hour or – can produce 4,000 cheese/hour – o.c. of 1 cheese is 0.333 wine – oc. of 1 unit of wine is 3 cheese Opportunity cost of One wine one cheese China 1/3 cheese 3 wine Montenegro 3 cheese 1/3 wine
An EXample(cont) 一三 3 Montenegros PPF China's PPF wine(thousands per hour) 10
10 An Example (cont) 1 2 3 4 wine (thousands per hour) 1 2 3 5 4 cheese (thousands per hour) Montenegro’s PPF 1 China’s PPF