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Macroeconomics 2133

by: Henry Notetaker

Macroeconomics 2133 ECON 2133

Henry Notetaker
GPA 2.89

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About this Document

This is from a specific slide show given to me by my professor. It is still a fantastic description of Trade between nations and how it makes them better off. Remember there is a test coming up thi...
Nehad Elsawaf
Macroeconomics: Interdependence and gains from trade slide show
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This 3 page Bundle was uploaded by Henry Notetaker on Tuesday February 9, 2016. The Bundle belongs to ECON 2133 at East Carolina University taught by Nehad Elsawaf in Spring 2016. Since its upload, it has received 168 views. For similar materials see Macroeconomics in Economcs at East Carolina University.


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Date Created: 02/09/16
Chapter  3:  Real  World  Interdependence  and  The  Gains  from  Trade     In  this  chapter  from  my  professor,  Dr.  Nehad  Elsawaf,  she  goes  over  a  macro-­‐ perspective  example  of  our  classes  “Chapter  3”.  Still  a  great  explanation  of  the  division  of  labor   hours  and  assumptions  for  trade.         1)   Interdependence   a)   Every  day  you  rely  on  many  people  from  around  the  world,  most  of  whom   you  have  never  met,  to  provide  you  with  the  goods  and  services  you  enjoy.   i)   i.e.  Deodorant,  cell  phone,  clothes,  coffee.   2)   Our  Example   a)   Two  countries:  U.S.  and  Japan   b)  Two  goods:  computers  and  wheat   c)   One  recourse:  Labor,  measured  in  hours   d)  The  U.S.  has  50,000  hours  of  labor  available.   i)   Producing  1  computer  requires  100  hours  of  labor.   ii)   Producing  1  ton  of  wheat  requires  10  hours  of  labor.   e)   Without  trade,  suppose  the  U.S.  decides  to  half  it ’s  labor  hours  into  each   good:  250  computers,  2500  tons  of  wheat.   f)   Japan  has  30,000  hours  of  labor  available.   i)   Producing  1  computer  requires  125  hours.   ii)   Producing  1  ton  of  wheat  requires  25  hours  of  labor.   g)   Without  trade,  suppose  Japan  decides  to  half  it’s  labor  hours  into  each   good:  120  computers,  600  tons  of  wheat.   U.S.  PPF  Without  Trade Japan  PPF  Without  Trade 6000 1400 5000 1200 1000 4000 3000 800 600 2000 400 1000 200 0 0 0 200 400 600 0 100 200 300               3)   Suppose  the  U.S.  produces  3400  tons  of  wheat.  How  many  computers  would   the  U.S.  be  able  to  produce  with  its  remaining  labor?   a)   3400  tons  requires  34,000  labor  hours  leaving  16,000  used  towards   computers  making  160.     4)   Suppose  Japan  produces  240  computers.  How  many  tons  of  wheat  would   Japan  be  able  to  produce  with  its  remaining  labor?     a)   240  computers  requires  all  of  Japans  labor  hours  so  they  will  produce  240   computers  and  0  tons  of  wheat.     5)   Now  the  U.S.  and  japan  decide  to  trade:   a)   U.S.  gives  Japan  700  tons  of  wheat   b)  Japan  gives  U.S.  110  computers.   6)   The  new  consumption  under  trade  for  the  U.S.  is:     a)   160(original)+110(imported)=  270  computers   b)  3400(original)-­‐700(exported)=  2700  tons  of  wheat   7)   The  new  consumption  under  trade  for  Japan  is:   a)   240(original)-­‐110(exported)=  130  computers   b)  700(imported)  tons  of  wheat   8)   Both  of  these  new  points  on  the  nations  PPF’s  are  above  the  curve  meaning   trade  makes  both  nations  better  off.     U.S.  PPF  With  Trade Japan  PPF  With  Trade 6000 1400 5000 1200 1000 4000 800 3000 600 2000 400 1000 200 0 0 0 200 400 600 0 100 200 300                   I)   So  if  the  U.S.  has  what  looks  like  an  absolute  advantage  in  producing  both   goods  why  does  Japan  specialize  in  computers?  Why  do  both  countries  gain   from  trade?   II)   Two  Measures  of  the  Cost  of  a  Good   a)   Two  countries  can  gain  from  trade  when  each  specializes  in  the  good  it   produces  at  lowest  cost.   b)  Recall:  another  measure  of  cost  is  opportunity  cost.     c)   In  our  example,  the  opportunity  cost  of  a  computer  is  the  amount  of  wheat   given  up  due  to  shift  in  focus  of  labor  hours.   III)  What  is  the  OP  and  the  CA  of  the  two  countries?   a)   The  U.S.  oppt.  cost  of  a  computer  is  is  10  tons  of  wheat.  (1  comp.=100   hours)   b)  Japan’s  oppt.  cost  of  a  computer  is  5  tons  of  wheat.  (1  comp.=125  hours)     IV)  So  Japan  holds  a  comparative  advantage  in  computers.  Thus  is  why  it   specializes  in  computers.     V)  **Gains  from  trade  arise  from  comparative  advantage.**  


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