ECN 211 Notes Week 2
ECN 211 Notes Week 2 Ecn 211
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This 2 page Class Notes was uploaded by Jonathan Gonzales on Friday February 5, 2016. The Class Notes belongs to Ecn 211 at Arizona State University taught by Stefan Ruediger in Spring 2016. Since its upload, it has received 13 views. For similar materials see Macroeconomics in Economcs at Arizona State University.
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Date Created: 02/05/16
Economics Notes 3: Gains from Trade, Application of the PPF • Review: • Production Possibility Frontier (PPF) • Soon it will be explained how this concept relates to trade • Specialization and Exchange • It is only through trade that specialization is possible • If you specialize in accounting, you will need to trade your labour for other things, as accounting does not produce food and other necessities of life • Labour original currency • Application of the PPF • Specialization: Method of production in which each person concentrates on a limited number of activities • Specialization and Exchange • Enjoy greater production and higher living standards than would otherwise be possible • Allows for points beyond the PPF • Domestic Trade: Trade within countries • International Trade: Trade between countries • “Being selfsufficient makes no sense.” • If the United States and Japan are both making wheat and computers, then one can specialize in wheat (only produce wheat) and the other in computers if they trade • Allows them to have more than either would have without trade • Opportunity cost of computer… • In the United States: 10 tonnes of wheat • In Japan: 5 tonnes of wheat • Thus a computer is cheaper in Japan, meaning they ought to specialize • Without Trade • United States: Consumes 250 computers, 2500 tonnes wheat • Japan: Consumes 120 computers, 600 tonnes wheat • With Trade • United States: Consumes: 270 computers, 2700 tonnes wheat (Gains from trade: 20 computers, 200 tonnes wheat) • Produces: 160 computers, 3400 tonnes wheat • Imports: 110 computers, 0 tonnes wheat • Exports: 0 computers, 700 tonnes wheat • Japan: Consumes 130 computers, 700 tonnes wheat (Gains from trade: 10 computers, 100 tonnes wheat) • Produces: 240 computers, 0 tonnes wheat • Imports: 0 computers, 700 wheat • Exports: 110 computers, 0 tonnes wheat • In the real world, this may cause short term problems, and this model does not account for quality • Deals • Exports: Goods produced domestically and sold abroad • Imports: Goods produced abroad and sold domestically • Absolute Advantage: The ability to produce a good using fewer inputs than another producer • In previous example, U.S. has absolute advantage in both wheat and computers • Trade is most ideal when one country has an absolute advantage in one good, and the other country has the absolute advantage in another, however this is not necessary for trade to be beneficial • Relative Cost: The opportunity cost of one good given in terms of another good • Comparative advantage: The ability to produce a good at a lower opportunity cost than another producer • In previous example, Japan has comparative advantage in computers • Absolute advantage is not necessary to have comparative advantage • Specialize in whatever good had the lowest opportunity cost • If this is done and trade occurs, then the total “economic pie” will increase in size • International Comparative Advantage • Everyone is better off if each country specializes in something • Final Points • Trade can make everyone better off • In the real world, quantity isn’t everything, and other factors such as prices and demand may change the effectiveness of trade
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