Microeconomics Lecture Outline

1. Absolute advantage: comparing "absolute costs" (actual resources used)
   • An example:

     Labor hours	Taylor	Carpenter
     Suit	1	10
     Desk	10	1

     Output per week	Taylor	Carpenter
     Suit	40	4
     Desk	4	40

   • Potential gains from specialization/trade: consumption possibility frontier (Fig. 1-1)

2. Comparative advantage: comparing "opportunity costs" (relative resources used) [David Ricardo, 1817]
   • An example: [Lieberman & Hall, Ch.16]

     Labor hours	China	USA
     Desk	100	25
     Computer	500	50

     Opportunity costs	China	USA
     Desk	1/5 computer	1/2 computer
     Computer	5 desks	2 desks

     Specialization	China	USA	World
     Desk	+10	-8	+2
     Computer	-2	+4	+2

     	China		USA
     	Desk	Computer	Desk	Computer
     Specialization	+10	-2	-8	+4
     Import (+) / export (-)	-9	+3	+9	-3
     Net gain	+1	+1	+1	+1

   • Other examples:
     • Jordon v. Jennifer: lawn mowing and car purchase [Mankiw, Ch.3]

       Labor hours	Jordon	Jennifer
       Lawn	1	3
       Car	2	10000

     • Teamwork partners

   • Terms of trade: possible exchange rate (desk : computer) is [2, 5]
     • Why is 2 the lower limit?
     • Why is 5 the upper limit?

   • How does specialization/trade actually happen? --- "price"

     Market price	China	USA
     Desk	100 (= 100 * 1)	200 (= 25 * 8)
     Computer	500 (= 500 * 1)	400 (= 50 * 8)

     
     -- Assuming: China wage rate $1, USA wage rate $8 (both in US dollars)

   • Provisos: increasing production MC, transportation cost, trade barriers