An EXample(cont) Chinas opportunity cost: Montenegros opportunity cost: 7 1 wine costs 1/3 cheese, I wine costs 3 cheese and 1 cheese costs 3 wine and 1 cheese costs 1/3 wine 一三 4 Monteneg PPF 1}" China's PPF wine(thousands per hour)
11 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 4 b' b c a Montenegro’s opportunity cost: 1 wine costs 3 cheese, and 1 cheese costs 1/3 wine China’s opportunity cost: 1 wine costs 1/3 cheese, and 1 cheese costs 3 wine
An EXample(cont China has comparative advantage in producing wine, and montenegro has ca in producing cheese China specializes in wine production and Montenegro in cheese production Both countries are better off by engaging in international trade! 12
12 An Example (cont.) • China has comparative advantage in producing wine, and Montenegro has c.a. in producing cheese. • China specializes in wine production and Montenegro in cheese production. • Both countries are better off by engaging in international trade!
An EXample(cont) China-the country with absolute cost disadvantage--can benefit from trade Montenegro-the country with absolute cost advantage--can benefit from trade too But how much exactly do they produce? At what prices? 13
13 An Example (cont) • China—the country with absolute cost disadvantage—can benefit from trade • Montenegro—the country with absolute cost advantage—can benefit from trade too • But how much exactly do they produce? At what prices?
Relative Demand Relative Supply Analysis Pc D DC Sc DC. Sc DW. SW The two markets in the home country there are two markets in the foreign country 14
14 Relative Demand Relative Supply Analysis Sc Dc Dc, Sc Pc Sw Dw Dw, Sw Pw The two markets in the home country; there are two markets in the foreign country
Relative Demand Relative Supply Analysis P /P: relative price of cheese · Hence, we dont DID: relative demand for cheese need two S /S: relative supply of cheese separate diagrams for the Suppose income=expenditure home country d=s and d=s We just need to if and only if look at one relative demand relative supply diagram 15
15 Relative Demand Relative Supply Analysis • Hence, we don’t need two separate diagrams for the home country • We just need to look at one relative demandrelative supply diagram / : relative price of cheese / : relative demand for cheese / : relative supply of cheese Suppose income=expenditure and if and only if c w c w c w c c w w c c w w P P D D S S D S D S D S D S = = =