L12 - Comparative Advantage and Trade

Opportunity cost

Value of the best alternative you must sacrifice (monetary and non) applies to production and consumption

How to calculate comparative advantage

Calculate opportunity cost for each good

Compare opportunity cost for each good

Person with lower OC has CA

Absolute advantage

When the person is more productive at that good

Globalisation

Free movement of goods, services, money, people. Exists within countries and economic unions. Many restraints

Barriers for trade

Tariffs, quotas, non-tariff barriers

Advantages of globalisation

Increased: output, competition, variety of goods, prosperity for many countries

Lower prices

Disadvantages of globalisation

Lost jobs

Suppressing luxuries

Protecting infant industries

National security concerns

Revenue

Protection as a bargaining chip

Environmental and product safety concerns

Dumping

Selling goods below production costs

Not supported by economic theory - politically motivated