The document summarizes two key laws of economics:
1) The law of comparative advantage states that two countries can both benefit from trade even if one country is more efficient in producing all goods. If the opportunity costs of production differ between countries, each country will specialize in the goods they have a comparative advantage in producing.
2) The law of diminishing returns states that as more labor is added to produce a good, marginal production will first increase but then increase at a decreasing rate. Eventually, marginal production will decrease due to overcrowding and overspecialization that causes workers to get in each other's way.
The document summarizes two key laws of economics:
1) The law of comparative advantage states that two countries can both benefit from trade even if one country is more efficient in producing all goods. If the opportunity costs of production differ between countries, each country will specialize in the goods they have a comparative advantage in producing.
2) The law of diminishing returns states that as more labor is added to produce a good, marginal production will first increase but then increase at a decreasing rate. Eventually, marginal production will decrease due to overcrowding and overspecialization that causes workers to get in each other's way.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
The document summarizes two key laws of economics:
1) The law of comparative advantage states that two countries can both benefit from trade even if one country is more efficient in producing all goods. If the opportunity costs of production differ between countries, each country will specialize in the goods they have a comparative advantage in producing.
2) The law of diminishing returns states that as more labor is added to produce a good, marginal production will first increase but then increase at a decreasing rate. Eventually, marginal production will decrease due to overcrowding and overspecialization that causes workers to get in each other's way.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
i) Law of Comparative (or Relative) Advantage:two countries can gain from trade if the opportunity costs of Production (or relative prices)differ between the two countries.
Example:(1)IF Opportunity costs
different,even if one can produce more of all goods using fewer resources(eg labour) Both countries will benefit from trade if the opportunity costs of production (or relative prices)differ between the two countries Eg:If japan foregoes(opportunity cost )Wine it costs them 7500DVD players,but in RSA 2000 DVD players must be sacrificed ,so it costs relatively less to produce wine in RSA.So japan is in "absolute" terms 2.75 times more efficient than RSA in making dvds but only marginally more efficient in making wine,So RSA is relatively(not absolutely) more efficient(or less inefficient)in producing wine. But they will only effect such specialisation and trade if each can trade at a higher ratio than their opportunity cost: ie It is in the interest of Japan to exchange DVD players for wine with South Africa where it will get a liter of wine for only 2 DVD players. It is also in the interest of South Africa to exchange wine for DVD players with Japan since it can get 5 DVD players instead of only 2 DVD players
1) SOURCES OF COMPARATIVE ADVANTAGE:
a) Technology: "Product life cycle of international trade theory" ;korea cheap labour copies germany technology now exporter instead of importer as before. b) Abundant Resources: "Hecksher-Ohlin theory":Countries will tend to export those goods that most intensively use the countries relatively more abundant resouces.eg:Capital/Labour. c) Differences in taste and demand: If tastes for fish in A are more than in B,then A could be more expensive(greater demand) than in B,and more bigger/market for.Eg;social,religious,climatic,cultural. :ALSO:poor- necessities;less luxury.will trade with poor;rich(developed) will trade with rich -all make luxuries.
2:LAW OF DIMINISHING RETURNS:
AS the number of labourers increase from 0, the marginal production first increases,then increases at a decreasing rate untill it gets to a point where it starts to decrease.-due to overcrowding/ also overspecialisation,getting in each others way etc.