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BASIC ECONOMIC CONCEPTS • • • • • • PRODUCTION POSSIBILITY FRONTIER (PPF) OPPORTUNITY COST ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE SPECIALIZATION EXCHANGE Interdependence Every day you rely on many people from around the world, most of whom you’ve never met, to provide you with the goods and services you enjoy hair gel from China cell phone from Taiwan dress shirt from Vietnam coffee from Kenya PRODUCTION POSSIBILITY FRONTIER (PPF), OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE Two countries (namely A and B) produce car and rice, both countries have 720 labors Below table shows the required labors to produce one unit of rice or car a Draw the production possibility frontiers Show your choice of production as each country equally allocates the resources b What is the opportunity cost to produce each item? c Find the absolute advantage and comparative advantage of each country (if any) d If countries specialize and exchange? Show the result on the diagrams PRODUCTION POSSIBILITY FRONTIER (PPF), OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE Cost Total Car Rice Car Rice A 18 B 20 Opportunity Balance Specialization Exchange cost resources Car Car Absolute Advantage Comparative Advantage Rice Car Rice Rice Car Rice Car Rice Exchange Price 240 220 200 180 160 140 120 100 80 60 40 20 10 15 20 25 30 35 40 720 Cost A B 200 180 160 140 120 100 80 60 40 20 -1 Total Opp cost Allocation Specialization Exchange Car Rice Car Rice Car Rice Car Rice Car Rice Car Rice 18 20 40 36 120 180 3.0 5.0 1/3 1/5 20 18 60 90 40.0 0.0 0.0 180 21 19 76 104 38 150 40 180 40 180 Absolute advantage Car Rice B Comparative Advanatge Car A Rice B Price Exchange 19 Car 76 rice 21; 76 19; 104 11 13 15 17 19 21 23 25 27 A 29 31 33 35 37 39 41 43 45 PRODUCTION POSSIBILITY FRONTIER (PPF), OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE Cost Total Car Rice Car Rice A 20 B 18 Opportunity Balance Specialization Exchange cost resources Car Car Absolute Advantage Comparative Advantage Rice Car Rice Rice Car Rice Car Rice Exchange Price 240 220 200 180 160 140 120 100 80 60 40 20 10 15 20 25 30 35 40 720 Cost Car Rice 20 18 A B 260 240 220 200 180 160 140 120 100 80 60 40 20 Total Car Rice 36 144 40 240 Opp cost Car Rice 0.25 0.17 Allocation Car Rice 18 72 20 120 38 192 Specialization Car Rice 36 216 40 216 Exchange Car Rice 19 85 21 131 40 216 Absolute advantage Car 21; 131 19; 85 B Rice B Comparative Advanatge Car A Rice B Price Exchange 17 Car 85 rice 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 ... Car Rice 18 20 40 36 12 0 18 0 3.0 5.0 1/ 3 1/ 5 20 18 60 90 40.0 0.0 0.0 18 0 21 19 76 10 4 38 15 0 40 18 0 40 18 0 Absolute advantage Car Rice B Comparative Advanatge Car A Rice B Price Exchange 19 Car... 20 12 0 38 19 2 Specialization Car Rice 36 216 40 216 Exchange Car Rice 19 85 21 1 31 40 216 Absolute advantage Car 21; 13 1 19 ; 85 B Rice B Comparative Advanatge Car A Rice B Price Exchange 17 Car... Car A Rice B Price Exchange 19 Car 76 rice 21; 76 19 ; 10 4 11 13 15 17 19 21 23 25 27 A 29 31 33 35 37 39 41 43 45 PRODUCTION POSSIBILITY FRONTIER (PPF) , OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE