Economics 2 Professor Christina Romer Spring 2019 Professor David Romer LECTURE 2 COMPARATIVE ADVANTAGE AND THE GAINS FROM SPECIALIZATION January 24, 2019 I. OVERVIEW II. THE KEY ROLE OF DIFFERENCES IN RELATIVE ABILITY A. Intuition B. Example: Specialization within a household C. Reciprocal absolute advantage 1. Definition of absolute advantage 2. Comparing outcomes without and with specialization D. Comparative advantage 1. Definition of comparative advantage 2. Comparing outcomes without and with specialization 3. Reciprocal absolute advantage is just a special case of comparative advantage III. OPPORTUNITY COST AND COMPARATIVE ADVANTAGE A. Comparative advantage means that a producer has a lower opportunity cost B. There are gains from specialization when opportunity cost differs C. Comparative advantage is a relative concept IV. SPECIALIZATION AND THE CURVATURE OF THE PRODUCTION POSSIBILITIES CURVE A. Example: Specialization in a two-person economy B. PPC of two people combined without specialization C. PPC of two people combined with specialization D. What do we learn from this example? E. Will both parties gain from specialization? V. REAL-WORLD EXAMPLE: SHOULD CALIFORNIA GROW RICE? A. Facts about California agriculture and water use B. Relative opportunity cost of growing rice in California and Arkansas C. Are we specializing along the lines of comparative advantage?
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Economics 2 Professor Christina Romer Spring 2019 Professor David Romer
LECTURE 2
COMPARATIVE ADVANTAGE AND THE GAINS FROM SPECIALIZATION
January 24, 2019
I. OVERVIEW
II. THE KEY ROLE OF DIFFERENCES IN RELATIVE ABILITY
A. Intuition B. Example: Specialization within a household C. Reciprocal absolute advantage
1. Definition of absolute advantage 2. Comparing outcomes without and with specialization
D. Comparative advantage 1. Definition of comparative advantage 2. Comparing outcomes without and with specialization 3. Reciprocal absolute advantage is just a special case of comparative advantage
III. OPPORTUNITY COST AND COMPARATIVE ADVANTAGE
A. Comparative advantage means that a producer has a lower opportunity cost
B. There are gains from specialization when opportunity cost differs
C. Comparative advantage is a relative concept
IV. SPECIALIZATION AND THE CURVATURE OF THE PRODUCTION POSSIBILITIES CURVE
A. Example: Specialization in a two-person economy
B. PPC of two people combined without specialization
C. PPC of two people combined with specialization
D. What do we learn from this example?
E. Will both parties gain from specialization?
V. REAL-WORLD EXAMPLE: SHOULD CALIFORNIA GROW RICE?
A. Facts about California agriculture and water use
B. Relative opportunity cost of growing rice in California and Arkansas
C. Are we specializing along the lines of comparative advantage?
LECTURE 2Comparative Advantage and the Gains from Specialization
January 24, 2019
Economics 2 Christina RomerSpring 2019 David Romer
Announcements
• It is essential that you attend section this week.
• Some hints on taking notes and reading the textbook.
• Reminder: please put away all electronic devices.
• Also, please talk loudly so the whole class can hear!
I. OVERVIEW
Two Fundamental Building Blocks
• Scarcity, choice, and opportunity cost.
• Comparative advantage and the gains from specialization.
II. THE KEY ROLE OF DIFFERENCES IN RELATIVEABILITY
Example: Specialization within a Household
• Two activities: dishwashing and painting.
• There are 3 walls that need painting (and manydirty dishes).
Reciprocal Absolute AdvantageWalls Dishes
Abilities (per hour)C. 4 12D. 2 20
No Specialization (Each paints ½ hr. and washes ½ hr.)C. 2 6D. 1 10
3 16
Specialization (C. paints ¾ hr. and washes ¼ hr.; D. washes 1 hr.)C. 3 3D. 0 20
3 23
Absolute Advantage
• Someone or something can produce more with a given amount of resources.
Comparative AdvantageWalls Dishes
Abilities (per hour)C. 4 24D. 2 20
No Specialization (Each paints ½ hr. and washes ½ hr.)C. 2 12D. 1 10
3 22
Specialization (C. paints ¾ hr. and washes ¼ hr.; D. washes 1 hr.)C. 3 6D. 0 20
3 26
Comparative Advantage
• Someone or something is relatively more productive at one activity than at another.
Messages
• Comparative advantage is necessary for there to be gains from specialization.
• Reciprocal absolute advantage is just a special case of comparative advantage.
III. OPPORTUNITY COST AND COMPARATIVEADVANTAGE
Opportunity Cost and Comparative AdvantageAbilities (per hour)