`MacroEconomics 1a, HW # 2`

Running Head : Macroeconomics

MACROECONOMICS

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MACROECONOMICS

A great economist Alfred Marshall defined economics as the study of the use of scarce resources to satisfy unlimited human wants . For the world 's billions of people , desire for more and better resources is always present . But due to scarcity , choices must be made and choices often imply the presence of costs

Consider workers n Scotland who can pick either 20 pounds of coffee or shear 50 pounds of wool per hour . What will it cost for

a worker to be able to shear 50 pounds of wool in an hour ? The answer is 20 pounds of coffee . As seen in the example , this is the amount of coffee that a worker must sacrifice not to pick to be able to shear 50 pounds of wool Economists describe the 20 pounds of coffee as the opportunity cost of 50 pounds of wool

Let 's say in Columbia , a worker can pick either 200 pounds of coffee or shear 100 pounds of wool per hour . The opportunity cost of picking 200 pounds of coffee for Columbian workers is 100 pounds of wool . That amount of wool is how much it costs for a worker to pursue one product over the other . Opportunity cost is measured in terms of other goods and services instead of money itself . Every time choices are made opportunity cost is present

Going back to the two workers mentioned earlier , Columbian workers are said to have an absolute advantage in the production of both goods because they can make more of each product than Scottish workers . It is not indisputable why Columbian workers have the absolute advantage , the key point is simply they are better at producing both goods . The concept of absolute advantage merely depends on how much a certain product an individual can make while comparative advantage is determined by opportunity cost

Based on the example , the opportunity cost of 50 pounds of wool for Scottish workers is 20 pounds of coffee . Therefore , it costs 2 .5 pounds of wool for every pound of coffee . For Columbian workers , it is 0 .5 pound of wool per pound pf coffee

Columbian workers have a comparative advantage in coffee production because they produce coffee at a lower opportunity cost . But looking the other way around , Scottish workers have a comparative advantage in wool production because it only costs them 0 .4 pounds of coffee as compared to 2 pounds of coffee for every pound of wool for Columbian workers Although Columbian workers have the absolute advantage , they are relatively better only in the production of coffee

Consider the following table

Table 1 . Production of coffee and wool divided between two commodities

Coffee (lb ) Wool (lb

Scottish 10 25

Columbian 100 50

Assume Scottish workers specialize in wool production and Columbian worker dedicate 60 percent of their time in coffee production , refer to table 2

Table 2 . Production of coffee and wool with product specialization

Coffee (lb ) Wool (lb...