Gains From Trade (10/1/15)
Gains From Trade (10/1/15) ECON 201
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This 5 page Class Notes was uploaded by Joanna Tang on Monday October 5, 2015. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Fall 2015. Since its upload, it has received 30 views. For similar materials see Intro to Economics in Economcs at University of Tennessee - Knoxville.
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Date Created: 10/05/15
Economics Notes 10115 Mirco Topic Gains from Trade 0 Trade allows use to enjoy a larger variety of goods 0 Trade allows for more total goods to be produced and consumed Benefits of Globalization People 0 Consumers have access to larger variety of products and cheaper products 0 FDI creates jobs in both rich and poor countries rungs of the economic leader Firms 0 Access to better technology cheaper inputs not only labor more financial capital Country 0 Grow and prosper through specialization and division of labor 0 Cooperate regionally to have larger international presence World 0 Engenders more crossborder cooperation on global issues terrorism pollution poverty etc 0 Greater sharing of information technology and knowledge Criticisms of Globalization 0 Increase risk of spread of economic contagion 0 Creates a global Race to the Bottom 0 Large multinational firms in constant search for cheapest method of production 0 Destroys jobs or lower wages in rich countries 0 Workers and the environment are exploited in poor countries 0 Market distortions creates uneven playing fields disproportionately harming poorer countries 0 Leading to poor countries by large international organizations IMF saddles them with debts unable to repay e g Asian financial crisis Top World Exporters 2013 0 China 0 The USCC 0 Germany Top World Importers 2013 0 US 0 China Who does the US trade with 0 Canada 0 China 0 Mexico 0 Japan 0 And more What do we sell CarsTrucks 0 Aircraft 0 Noncrude oil 0 Ironsteel 0 And more What do we buy 0 Crude oil 0 CarsTrucks 0 NonCrude oil 0 Cell Phones US Concerns with Free Trade The trade deficit Because of trade the US doesn t make anything anymore It s unfair that US workers have to compete with lowerwage workers from other countries Because of trade and outsourcing jobs it takes away jobs from US workers Example You and your friend John are stuck on an island and there are only lobster and coconuts to eat on the island 0 Suppose that in a typical week 0 You can catch 10 lobsters or gather 30 coconuts or some combination 0 John can catch 4 lobsters or gather 20 coconuts or some combination Should you work with John to help each other survive Or will he bring you down and you both slowly starve to death Absolute Advantage 0 When a person country is more productive than other person country 0 A comparison of productivities across people countries gt You have the absolute advantage in lobsters gt You can catch more lobsters than John in the same week 0 10 to his 4 gt You have the absolute advantage in coconuts gt You can gather more coconuts than John in the same week 0 30 to his 20 John has the absolute advantage in nothing Should you Trade 0 Should you trade with John 0 On the surface answer seems an obvious no On the surface John seems basically worthless Let s look at the situation a different way How much does 1 lobster cost you to catch How much does 1 lobster cost John to catch How much does 1 coconut cost you to gather How much does 1 coconut cost John to gather VVVV39 Your Opportunity Cost 0 What is the slope of your PPF o 3 0 What does that mean 0 Every lobster you catch costs you 3 coconuts In the amount of time it takes you to catch a lobster you could have gathered 3 coconuts John s Opportunity Cost 0 What is the slope of John s PPF o 5 0 What does that mean 0 Every lobster he catches cost him 5 coconuts In the amount of time it takes John to catch a lobster he could have gathered 5 coconuts Summary of Opportunity Costs John O l lobster costs 5 coconuts O l coconuts costs you 15 lobster You 0 l lobster costs 3 coconuts 0 l coconuts costs 13 lobster Comparative Advantage 0 When on person or country can produce a good at a lower cost than another personcountry 0 A comparison of the opportunity costs between individuals or countries 0 You have the comparative advantage in lobsters 0 You lose fewer coconuts than John when catching lobster 0 John has the comparative advantage in coconuts 0 He loses fewer lobsters than you when gathering coconuts Trade Rates 0 Let you catch lobster and John gather coconuts 0 Trade with each other at the end of the week 0 But how many lobsters for how many coconuts 0 How many lobsters should you give John and how many coconuts should he give you GOAL We want both parties to gain Trade Rates Price of a Lobster 0 You have the comparative advantage in lobsters 0 l lobster cost you 3 coconuts 0 l lobster costs John 5 coconuts 0 You want to sell lobsters 0 John wants to buy lobsters 0 To make yourself better off you need to charge a price higher than your cost 0 To make himself better off John wants to pay less than his cost 0 Therefore 1 lobster should trade for between 3 and 5 coconuts Trade Rates Price of 3 Coconut John as the comparative advantage in coconuts 0 1 coconut costs John 15 of a lobster 0 2 coconut costs you 13 of a lobster John wants to sell coconuts 0 You want to buy coconuts To make himself better off John needs to charge a price higher than his cost 0 To make yourself better off you want to pay less than your cost 0 Therefor 1 coconut should trade for between 13 and 15 lobsters Propose a Trade What do you end up after trade Before Trade You 10 lobsters 0 coconuts John 0 lobsters 20 coconuts After Trade You 6 lobsters 16 coconuts John 4 lobsters 4 coconuts Are you both better off
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