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Macroeconomics Ch. 3 Notes

by: bauer47 Notetaker

Macroeconomics Ch. 3 Notes ECN-120

Marketplace > Iowa Central Community College > Economcs > ECN-120 > Macroeconomics Ch 3 Notes
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About this Document

These notes cover Interdependence and the Gains from Trade.
Principles of Macroeconomics
Joshua M. Phillips
Class Notes
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This 2 page Class Notes was uploaded by bauer47 Notetaker on Saturday January 23, 2016. The Class Notes belongs to ECN-120 at Iowa Central Community College taught by Joshua M. Phillips in Fall 2015. Since its upload, it has received 13 views. For similar materials see Principles of Macroeconomics in Economcs at Iowa Central Community College.


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Date Created: 01/23/16
Chapter 3 Interdependence and the Gains from Trade Interdependence 1. One of the Ten Principles from Chapter 1: a. Trade can make everyone better of 2. We now learn why people (and nations) choose to be interdependent 3. Examples: a. Two countries: US and Japan b. Two goods: computers and wheat c. One resource: labor, measured in hours d. We will look at how much of both goods each country produces and consumes i. If the country chooses to be self sufficient ii. If the countries choose to trade e. PPF in the US (without trade) i. The US has 50,000 hours of labor available for production per month ii. Producing one computer requires 100 hours of labor iii. Producing one ton of wheat requires 10 hours of labor iv. On the line is possible and efficient, under the line is possible but inefficient, above the line is impossible f. PPF in Japan (without trade) i. Japan has 30,000 hours of labor available for production per month ii. Producing one computer requires 125 hours of labor iii. Producing one ton of wheat requires 25 hours of labor iv. On the line is possible and efficient, under the line is possible but inefficient, above the line is impossible g. Without trade: i. US: 250 computers, 2500 tons of wheat ii. Japan: 120 computers, 600 tons of wheat h. Production under trade: i. US produces 3400 tons of wheat, 160 computers ii. Japan produces 240 computers, 0 tons of wheat Exports and Imports 4. Exports: goods produced domestically and sold abroad 5. Imports: goods produced abroad and sold domestically a. Consumption under trade: i. US exports 700 tons of wheat to Japan, imports 110 computers from Japan 1. Japan imports 700 tons of wheat, exports 110 computers ii. US with trade: 2700 tons of wheat left, 270 computers now iii. Japan with trade: 700 tons of wheat now, 130 computers left b. Trade makes both countries better of (consumption without trade compared to consumption with trade): i. US gains: 20 computers and 200 tons of wheat ii. Japan gains: 10 computers and 100 tons of wheat 6. Absolute advantage: the ability to produce a good using fewer inputs than another producer a. US has an A.A. in wheat: producing a ton of wheat uses 10 labor hours vs 25 in Japan b. If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade 7. Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer a. Must determine the opportunity cost to figure out who has the comparative advantage i. Opportunity Cost of a computer: 1. 10 tons of wheat in the US 2. 5 tons of wheat in Japan ii. Japan will have the comparative advantage because they are giving up less wheat to produce more computers b. Gains from trade arise from comparative advantage (diferences in opportunity costs)


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