Week 3 notes - Gains from Trade
Week 3 notes - Gains from Trade Econ 202
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This 2 page Class Notes was uploaded by Jessica Hutchinson on Tuesday September 20, 2016. The Class Notes belongs to Econ 202 at Towson University taught by Dr. Rhoades in Fall 2016. Since its upload, it has received 5 views. For similar materials see Macroeconomics in Macro Economics at Towson University.
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Date Created: 09/20/16
Chapter 3 Gains from Trade Production possibilities frontier – economic model that shows the alternative combinations of 2 goods and services that an economy can produce with the current available resources and technology in a given time period. o Designed to analyze: Economic growth Scarcity Economic trade offs Opportunity costs o Each point on the curve and under the curve represents a combo of goods that can be produced o Bowed out because of increasing opportunity costs. Point A (0,12): if we used all resources to produce 12,000 leather jackets Point D (6,0): if we used all resources to produce only 6,000 computers Note: we cannot have point A and point D at the same time because resources are always limited and can only be towards a certain amount of each item. Production efficiency The economy can produce any combination of goods and services that lies on or below the curve. Points on the PPF curve line represents production efficiency o Goods and services are produced at their lowest resource cost o All of the economy’s resources are being productively employed o Points outside of the curve or frontier are impossible o Points inside of the curve or below the line are possible but an inefficient use of resources (a waste) o Points on the line or curve are possible and efficient Allocative Efficiency: Tells us that the mix of goods and services produced are just what individuals in society desire Society must decide where on the PPF to allocate their resources depending on what they want o Ex. How many jackets and computers to produce Law of increasing opportunity cost: As we devote more resources to the production of one good, the opportunity cost of producing that good increases Illustrated by moving along the PPF Example o Moving from point A to Point B o 2 jackets = 3 computers o Opportunity cost of 1 more computers is 2/3 jackets = 1 computer which is 0.6 thousand. Opportunity cost increases as companies produce more computers Modeling economic growth Over time, the production possibilities frontier can shift outward in response to o Increases in capital stock o Improvements in technology and human resources Such growths lead to increased GDP per capita. Changes in population: Increases in population can lead to an outward shift of PPF o If output is growing faster than the population, GDP per capita increases o If output is growing at the same rate as the population, GDP per capita doesn’t change o If output is growing slower than the population, GDP per capita decreases Comparative Advantage: Being able to produce at a lower opportunity cost than someone else Absolute advantage: being able to produce a certain product at a lower opportunity cost than someone else. Example: Chile and the united states are both able to produce bread and avocados Each country (to save on money) will most likely specialize in producing goods only if they know they’re getting some specialize product back at a lower rate
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