LAWS of ECONOMICS

-1- Chapter 5.1 page 421t,35s

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.