Econ Week 7
U of M
Popular in Principles of Microeconomics
verified elite notetaker
Popular in Economcs
This 3 page Class Notes was uploaded by Emma Norden on Saturday October 24, 2015. The Class Notes belongs to Econ 1101 at University of Minnesota taught by Thomas Holmes in Fall 2015. Since its upload, it has received 38 views. For similar materials see Principles of Microeconomics in Economcs at University of Minnesota.
Reviews for Econ Week 7
It's well detailed
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/24/15
Week 7 101915 Chapter 3 Interdependence and the Gains from Trade Page 47 One of the Ten Principles of Economics is Trade can make everyone better o 0 Rose and Frank both work 8 hours a day 0 Frank can produce 1 oz of potatoes in 15 minutes and 1 oz of meat in 60 minutes 0 Rose can produce 1 oz of potatoes in 10 minutes and 1 oz of meat in 20 minutes Time needed to make 1 oz mins Amount produced in 8 hours Meat Potatoes Meat Potatoes Frank 60 minsoz 15 minsoz 8 oz 32 oz Rose 20 minoz 10 minsoz 24 oz 48 oz Production Possibilities Frontier graph shown on page 49 0 Frank can spend all 8 hours producing 8 oz of meat or all 8 hours producing 32 oz of potatoes If he splits his time in half he can produce 4 oz of meat and 16 oz of potatoes 0 Rose can spend all 8 hours producing 24 oz of meat or 48 oz of potatoes If she splits her time evenly she can produce 12 oz of meat and 24 oz of potatoes Trade makes people better off because it allows them to specialize in what they do best In Rose and Frank s situation If Frank specializes in producing potatoes he can produce 32 oz of potatoes and give 15 oz to Rose Rose can spend 6 hours producing meat to get 18 oz of meat and 2 hours producing 12 oz of potatoes Rose gets 15 oz of potatoes from Frank and Frank gets 5 oz of meat from Rose Page 51 Absolute advantage the producer who requires the least amount of input in order to produce a good In this example Rose has the absolute advantage in both Opportunity cost what is given up in order to get an item in other words the tradeoff ex The time Rose takes up producing potatoes is time she could be producing meat 0 Rose For every 10 minutes taken to produce 1 oz potato she could produce 12 oz meat 0 Frank For every 60 minutes taken to produce 1 oz of meat he could produce 4 oz potatoes Rose s opportunity cost 12 Frank s opportunity cost 14 Comparative advantage Term used when comparing opportunity costs between 2 producers 1 oz of potatoes costs Frank 1 oz of meat while it costs Rose 12 oz of meat Thus Frank has a comparative advantage in producing potatoes and Rose has a comparative advantage in producing meat 0 While one person can have an absolute advantage in both goods Rose one cannot have a comparative advantage in both goods The greater the opportunity cost of one good the lower the opportunity cost of the other 0 Gains from specialization and trade are based on comparative advantage not absolute advantage 0 Trade increases the economic pie How does each benefit Franllt gets 5 oz of meat in exchange for 15 oz of potatoes 5oz meat150z potatoes loz meat3oz potatoes for every oz of meat he gets from Rose he pays her with 3 oz of potatoes This is lower than his opportunity cost for an oz of meat which is loz meat4 oz potatoes Rose gets 15 oz potatoes in exchange for 5 oz of meat 1 oz of potatoes costs her 13 oz of meat which is lower than her opportunity cost of potatoes which is 12 0 For both parties to gain from trade the price at which they trade must be between the opportunity costs of each person Example on page 55 Suppose the Japan and the US can each produce 1 car a month But Japan can only produce 1 ton of food while the US can produce 2 tons In that case the US has a comparative advantage in producing food and Japan has a comparative advantage in producing cars Page 58 Chapter 9 Application International Trade In order to determine if a country Isoland will be an exporter or importer of textiles the domestic price price in that country must be compared to the world price price in the world market before international trade is allowed If the world price is higher than the domestic price producers will export the good because they get a better price If the world price is lower consumers will import the good because it is cheaper This indicates whether or not Isoland has a comparative advantage in producing textiles After Isoland joins the world market their domestic price becomes the world price Graph on page 174 If domestic supply is greater than the domestic demand after price of textiles becomes the world price Isoland will be an exporter Producers are better off but consumers are worse off Trade raises economic wellbeing of a nation because the gains of the winners exceed losses of the losers If the world price is lower than the domestic price Isoland becomes an importer Consumers are better off and producers are worse off 0 International trade expands the size of the economic pie but might be giving some people a smaller piece Tariff tax placed on imported goods A tariff would raise the price of imported textiles above the world price by the amount of the tariff A tariff reduces the domestic quantity demanded and raises the domestic quantity supplied Domestic producers are better off and domestic consumers are worse off Tariffs move the domestic market closer to the equilibrium without trade A tariff causes a deadweight loss and total surplus falls Graph on page 178 Other benefits to international trade 1 Increased variety of goods 2 Lower costs through economies of scale Some goods can only be produced at lower costs if they are produced in larger quantities opening trade to the world market would do this 3 Enhanced ow of ideas Poor countries can learn about technological advances by importing those products Arguments against free trade Loss of jobs Reducing the quantity supplied would reduce the number of workers needed but those workers could get jobs created in industries where Isoland has a comparative advantage
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'