A New House Decision Analysis

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A New House – Decision Ken R. Johnson XECO 212 March 31, 2012 Instructor: Yvonne Shivers A New House – Decision A highly sought after aspect of the American Dream, buying a house can be a daunting task for many Americans without experience or knowledge of the housing market. So daunting that many individuals and families entertain misconceptions about buying a house from never being able to make enough to afford a house to fear of being denied over bad credit; however these misconceptions are only based on inflated expectations and lack of knowledge or awareness to housing market practices. (CRS 2009) In fact there are many available options for any potential house-buyer to take advantage of from…show more content…
However to examine the impact of these interactions, the potential house-buyer must be aware of the benefits of trade. According to Mankiw, trade makes everyone better off due to the principle of comparative advantage and the ability to specialize within the domestic market. (Mankiw 2007) Comparative advantage is the ability to produce a good at lower cost of opportunity than another producer; for example, suppose there are two manufactures of treated lumber which is required to build houses. One manufacture grows, harvests, and treats all of its own lumber while the other buys from third-party lumber companies. Since the first manufacturer can produce the treated lumber without any additional input, they have absolute advantage over the other manufacturer and can be a price setter within the domestic market. The other manufacturer is limited by the amount of lumber it can purchase but has a better treatment facility so it cost less for them to treat their lumber. In this sense the second manufacturer has comparative advantage in producing treated lumber but their resources are limited by how much is harvested within the domestic market and thus they are price takers. However, suppose America opened trade relations with South America, a country with relatively low population density with desperate need for medical supplies and computer technology but covered with deep thick jungles. This new source of lumber is cheaper to harvest due to the massive quantities that allow the second manufacturer to stop buying the limited amount of lumber within its domestic market. Without having to worry about the high price and limited supply of lumber anymore, the second manufacturer can focus on what it does best, producing treated lumber. With more treated lumber in the domestic market, housing prices would start dropping as the price of treated

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