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Comparative Advantage: "IOU" method

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Comparative Advantage: "IOU" method

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Comparative Advantage: "IOU" method

  1. 1. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 40W BRAZIL 30C 90W Input Problem. Land (acres) and Labor are the INPUTS used to produce OUTPUTS like Corn and Wheat.
  2. 2. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 20C 1 Corn = _____ 40W 1C = 1/2 (or .5)W 40W BRAZIL 30C 90W Input Problem. Land (acres) and Labor are the INPUTS used to produce OUTPUTS like Corn and Wheat. “IOU” stands for “INPUT: OTHER UNDER”. CORN ACRES (US): When determining the Opportunity Cost of one INPUT (Corn acres), you take the quantity of the “OTHER” good (Wheat acres) and put it UNDER Corn acres to form a ratio of Corn acres-to-Wheat acres. When you reduce 20C/40W you get 1 Corn Acre = ½ (or .5) Wheat Acre. “UNDER”
  3. 3. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 20C 1 Corn = _____ 40W 1C = 1/2 (or .5)W 40W BRAZIL 30C 30C 1 Corn = _____ 90W 1C = ⅓ (or .33) W 90W Input Problem. Land (acres) and Labor are the INPUTS used to produce OUTPUTS like Corn and Wheat. “IOU” stands for “INPUT: OTHER UNDER”. CORN Acres (BRAZIL): When determining the Opportunity Cost of one INPUT (Corn acres), you take the quantity of the “OTHER” good (Wheat acres) and put it UNDER Corn acres to form a ratio of Corn acres-to-Wheat acres. When you reduce 30C/90W you get 1 Corn Acre = ⅓ (or .33) Wheat Acre “UNDER”
  4. 4. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 20C 1 Corn = _____ 40W 1C = 1/2 (or .5)W 40W 40W 1 Wheat = _____ 20C 1W = 2 C BRAZIL 30C 30C 1 Corn = _____ 90W 1C = ⅓ (or .33) W 90W Input Problem. Land (acres) and Labor are the INPUTS used to produce OUTPUTS like Corn and Wheat. “IOU” stands for “INPUT: OTHER UNDER”.. WHEAT Acres (US): When determining the Opportunity Cost of one INPUT (WHEAT acres), you take the quantity of the “OTHER” good (CORN acres) and put it UNDER WHEAT acres to form a ratio of Wheat acres-to-Corn acres When you reduce 40W/20C you get 1 Wheat Acre = 2 Corn Acres. “UNDER”
  5. 5. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 20C 1 Corn = _____ 40W 1C = 1/2 (or .5)W 40W 40W 1 Wheat = _____ 20C 1W = 2 C BRAZIL 30C 30C 1 Corn = _____ 90W 1C = ⅓ (or .33)W 90W 90W 1 Wheat = _____ 30C 1W = 3C IN Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. WHEAT aces (BRAZIL): When determining the Opportunity Cost of one INPUT (WHEAT acres), you take the quantity of the “OTHER” good (CORN acres) and put it UNDER WHEAT acres to form a ratio of Wheat acres-to-Corn Acres. When you reduce 90W/30C you get 1 Wheat acre = 3 Corn Acres. “UNDER”
  6. 6. Country Corn Acres Opportunity Cost of 1 Acre of Corn In terms of Wheat Acres Wheat Acres Opportunity Cost of 1 acre of Wheat In terms of Corn Acres US 20C 20C 1 Corn = _____ 40W 1C = 1/2 (or .5)W 40W 40W 1 Wheat = _____ 20C 1W = 2 C BRAZIL 30C 30C 1 Corn = _____ 90W 1C = ⅓ (or .33)W 90W 90W 1 Wheat = _____ 30C 1W = 3C Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “IOU” stands for “INPUT: OTHER UNDER”. Now to answer the important questions 1. Which country produces Corn (Wheat) at the LOWEST Opportunity Cost? 2. Which country is SPECIALIZES in Corn (Wheat)? 3. Which country EXPORTS Corn (Wheat)? Imports Corn (Wheat)?

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