Before specialization in production X product Y product output Labor time output Labor time A country 4 3 B country 5 Labor time: 7X+ 5y After specialization in production X product Y product output Labor time output Labor time A country 8 0 B countr 0 0_6 5 Labor time: 8X+ 6y>7x+ 5y
X product Y product output Labor time output Labor time A country 4 1 3 1 B country 3 2 2 1 Before specialization in production 5 Labor time: 7x + 5y After specialization in production X product Y product output Labor time output Labor time A country 8 2 0 0 B country 0 0 6 3 5 Labor time: 8x + 6y > 7x + 5y
2.3.3 The gains from trade U.S U.K Wheat (unit/man-hour) 6 Cloth(unit/man-hour) 2 If trade is possible 6W> 4C(since 6w=4c in the united states) 2c>1W(since 2c=1w in the united kingdom) SO. 12C>6W>40 Suppose the United States could exchange 6W for 6C with the United Kingdom The United States would then gain 2C(or save 1/2 hour of labor time The United Kingdom gain 6C(or save three hours of labor time So both nations can gain from the trade
2.3.3 The gains from trade U.S. U.K. Wheat (unit/man-hour) 6 1 Cloth (unit/man-hour) 4 2 If trade is possible 6W > 4C (since 6w=4c in the united states) 2C > 1W (since 2c=1w in the united kingdom) so, 12C > 6W > 4C Suppose the United States could exchange 6W for 6C with the United Kingdom The United States would then gain 2C (or save 1/2 hour of labor time) The United Kingdom gain 6C (or save three hours of labor time) So both nations can gain from the trade
2.3.4 A lot of simplifying assumptions a. only two nations and two commodities b. free trade C. perfect mobility of labor within each nation but immobility between the two nations d. constant costs of production e. no transportation costs f. no technical change g. the labor theory of value either labor is the only factor of production or labor is used in the same fixed proportion in the production of all commodities abor is homogeneous
2.3.4 A lot of simplifying assumptions: a. only two nations and two commodities b. free trade c. perfect mobility of labor within each nation but immobility between the two nations d. constant costs of production e. no transportation costs f. no technical change g. the labor theory of value either labor is the only factor of production or labor is used in the same fixed proportion in the production of all commodities. labor is homogeneous
2. 4. The opportunity cost theory 2.4.1. the definition of the opportunity cost The opportunity cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity 2.4.2. the law of comparative cost The nation with the lower opportunity cost in the production of a commodity has a comparative advantage in that commodity, and a comparative disadvantage in the second commodity
2.4. The opportunity cost theory 2.4.1. the definition of the opportunity cost The opportunity cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity. 2.4.2. the law of comparative cost The nation with the lower opportunity cost in the production of a commodity has a comparative advantage in that commodity; and a comparative disadvantage in the second commodity
U.S U.K Wheat(unit/man-hour) 6 Cloth(unit/man-hour In the U.S.A. 6w/4c=1w/? ?=2/3(c) So the opportunity cost of wheat is two-thirds(2/3 )of a unit of cloth In the U.K. 1w/2c=1w/??=2C So the opportunity cost of wheat is two(2)of a unit of cloth The opportunity cost of wheat is lower in the united states than in the united kingdom The united states would have a comparative cost advantage over the united kingdom in wheat
U.S. U.K. Wheat (unit/man-hour) 6 1 Cloth (unit/man-hour) 4 2 In the U.S.A. 6w/4c=1w/? ?=2/3(c) So the opportunity cost of wheat is two-thirds (2/3) of a unit of cloth. In the U.K. 1w/2c=1w/? ?= 2 c So the opportunity cost of wheat is two (2) of a unit of cloth The opportunity cost of wheat is lower in the united states than in the united kingdom. The united states would have a comparative cost advantage over the united kingdom in wheat