Economics 200 Week 2
Economics 200 Week 2 ECON 200
Popular in Introduction to Macroeconomics
Popular in Economics
This 2 page Class Notes was uploaded by Charles Smith on Saturday September 10, 2016. The Class Notes belongs to ECON 200 at James Madison University taught by in Fall 2016. Since its upload, it has received 9 views. For similar materials see Introduction to Macroeconomics in Economics at James Madison University.
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Date Created: 09/10/16
Division of labor among several groups makes a specialization of skills and tools. Trade makes investing in a specialized market worth it. A rich and highly productive economy can benefit from trade with a poor low productive economy. Sometimes because production is easier or cheaper there. Example, a specialized individual with building skills, would be better off building a house than you would be. The three benefits of trade: Trade makes people better off when preferences differ, trade increases productivity through specialization and the division of knowledge, Trade increases productivity through specialization. Why do we trade? 1) We trade because trade value, unlike market value, is purely perceptive. What is a bad deal for certain economies, could be an excellent deal for another. 2) We also trade because of the importance that we see in specialization, productivity, and the division of knowledge. Modern economics require more knowledge than can exist in a single brain. Specialization allows us to increase our knowledge, and therefore increases our productivity. Without specialization it's not possible. Trade connects all markets. Trade increases our entire market size, which thereby allows us to increase our division of knowledge. Entrance of large resource countries benefits world trade. Specialization creates a large net of societal knowledge. The Larger the market, the more specialists needed. It's a cycle that forever continues. 3) Comparative Advantage is another reason that we trade. A country has a comparative advantage in producing goods for which it has the lowest opportunity cost. Allows both trading partners to benefit from trade. (Not to be confused with absolute advantage The ability to produce the same goods using fewer inputs than another producer.) *Just because the U.S. can do better at say, making shoes, it's better for another country like, Indonesia, to specialize in shoe making, so the U.S. can specialize in more relevant things, to its market. Why Absolute Advantage Doesn't Matter? Just because a person or country can produce more of a good than others doesn't necessarily mean it can be produced better. Martha Stewart makes more money writing her books on housekeeping, than she does actually housekeeping. It makes more sense for her to spend time on her work then housekeeping. So she hires housekeepers. Suppose that a certain amount of labor can produce a various number of computers or shirts. Mexico, using that amount of labor, can make one computer, or six shirts. SO, the opportunity cost of a computer made in Mexico, is six shirts. The opportunity cost of a shirt, is one sixth of a computer. Another name for the opportunity cost is the “trade off”. Suppose that in the U.S., that same amount of labor could produce 12 shirts or 2 computers. Comparatively, the U.S. has a lower Opportunity cost to make computers and Mexico has a lower Opportunity cost to make shirts.Thereby, regardless of the U.S. absolute advantage. It would be better for the U.S. to make computers and for Mexico to make shirts. Comparatively, with no trade, both countries are worse off than if they were to utilize specialization. Economist agree, a rare occasion, the trading with other countries is good for both economics. Quote by Adam Smith “Never to attempt to make at home what it will cost him more to make than to buy. Globalization is NOT NEW. Phoenicians around 1550 B.C. were extensive traders. The Roman Empire around 753 B.C. used specialization through trade.
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