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CHAPTER 2: THE LAW OF COMPARATIVE ADVANTAGE - Coggle Diagram
CHAPTER 2: THE LAW OF COMPARATIVE ADVANTAGE
MERCANTILISM
WHAT IS MERCANTILISM
:star: COUNTRY WEALTH WAS DETERMINED BY ITS ACCUMULATION OF GOLD AND SILVER
:star: THE COUNTRIES MUST SELL MORE THAN BUYS TO MAKE A PROFIT
:star: COUNTRY NEEDED A FAVOURABLE BALANCE OF TRADE MEANING THAT THE COUNTRY EXPORTS MORE THAN IMPORTS.
MERCANTILISM: ADAM SMITH'S CRITICISM
:star: ADAM SMITH REJECT THE IDEA THAT COUNTRY'S WEALTH IS DETERMINED BY ITS ACCUMULATION OF GOLD AND SILVER
:star: ADAM SMITH SAID THAT IT IS THE PRODUCE OF COUNTRY'S LAND AND LABOR THAT COULD BE CONSIDERED AS NATIONAL WEALTH ( KNOWN AS TOTAL OUTPUT OR GDP)
:star: HE ARGUED THAT MERCANTILISM DID NOT INCREASED COUNTRY'S OUTPUT BECAUSE:
CREATED MONOPOLIES
REDUCE OVERALL TRADE AND SPECIALIZATION
:star: INTERNATIONAL TRADE IS NOT ABOUT RIVALRY BUT MUTUAL BENEFICIAL
ABSOLUTE AND COMPARATIVE ADVANTAGE
ABSOLUTE ADVANTAGE :check:
THEORY OF ABSOLUTE ADVANTAGE
:star: YOU CAN DO MORE OF SOMETHING DURING A GIVEN TIME
:star: A COUNTRY IS SAID TO HAVE AN ABSOLUTE ADVANTAGE IF IT COULD PRODUCE MORE OF ONE GOOD THAN ANOTHER COUNTRY USING SAME AMOUNT OF RESOURCES
ASSUMPTIONS OF ABSOLUTE ADVANTAGE
:star: ONLY 2 PRODUCT
:star: FULL EMPLOYMENT OF FACTORS OF PRODUCTION
:star: ONLY 2 COUNTRIES
:star: PERFECT MOBILITY OF RESOURCES
COMPARATIVE ADVANTAGE :check:
THEORY OF COMPARATIVE ADVANTGE
:star: WHO CAN PRODUCE A GOOD FOR THE LOWEST OPPORTUNITY COST
:star: COMPARATIVE ADVANTAGE FOCUS ON UNITS PRODUCED NOT COSTS.
:star: WHEN THE COUNTRY HAVE EVERY ABSOLUTE ADVANTAGE, THEY WILL NEVER HAVE EVERY COMPARATIVE ADVANTAGE
ASSUMPTIONS OF COMPARATIVE ADVANTAGE
:star: ONLY 2 COUNTRIES
:star: ONLY 2 PRODUCTS
:star: FULL EMPLOYMENT OF FACTORS OF PRODUCTION
:star: PERFECT MOBILITY OF RESOURCES
OPPORTUNITY COST
: :star: OPPORTUNITY COST REFERS TO THE VALUE A PERSON COULD HAVE RECEIVED BUT PASSED UP IN A PURSUIT OF ANOTHER OPTION.
:star: WHOEVER COULD DO SOMETHING FOR THE LOWER OPPORTUNITY COST, THE PERSON COULD DO IT CHEAPER.
:star: COUNTRY HAS TO FOCUS THEIR TIME ON TASKS THAT THEY ARE GOOD AT AS THEY WILL END UP AT BETTER POSITION. (LOWER OPPORTUNITY COST)
GAINS FROM TRADE
:star: TRADE ALLOWED EACH PERSON TO CONSUME A LITTLE MORE THAN THEY COULD HAVE
:star: IN THE LARGER COUNTRIES, THE BENEFITS OF THE TRADE ARE MANY HUNDREDS OF TIME LARGER
:star: IN THE ABSENCE OF TRADE, A NATION'S PPC ALSO REPRESENTS ITS CONSUMPTION FRONTIER