Only part:Gains from Trade

Week 2(Lecture 2+3): PPF intro and Basis for trade

Why do nations trade(3)

• Resources

• Efficient production

• Preferences

1) Natural, human and capital resources are unevenly

distributed around the world

2)The efficient production of various goods requires different

technologies or combinations of resources

3)Product differentiation, in terms of quality and non-

price attributes(some people may prefer certain goods to be imported than similar goods made domestically)

Production can be three types of intensive

• Land intensive (requires a lot of natural resources)

• Capital-intensive (requires a lot of machinery)

• Labour intensive (requires a lot of labour)

(ie. China is labour-intensive; it’s cheaper/better for them to produce a lot of clothes compared to SA, which has low employment,in contrast South afirca is land-intensive; it’s cheaper/btter for them to produce wheat compared to China, which does not have a lot of agricultural land.

What can change over time in Countries that affect its distribution of good/services (3)

RTP

1) Resources (SA no longer gold dominant)

2)Technology (China moved from labour intensive products to hi-tech)

3) Product distinctiveness( Japan no longer leader in unique tech like Sony,as South korea has become better with Samsung )

Define:

• Absolute advantage

• Comparative advantage

• Specialization

• Absolute Advantage – When a country can produce more of a good with the same resources than another country.

• Comparative Advantage – When a country can produce a good at a lower opportunity cost than another country, even if it doesn’t produce the most overall.

• Specialization – When a country focuses on producing goods where it has an advantage, making trade more efficient and increasing total output.

with comparative advantage what determines that a country is producing something at a lower opportunity cost.

-Explain it simply

-calculation

• the country sacrifices less of other goods to make it.(They give up less and produce more)

• Want to know-over-know

IE: How many computers are sacrificed between Country A and B

• Country A can produce 10 cars or 5 computers.

  • Opportunity cost of 1 car = 0.5 computers (5 ÷ 10)

• Country B can produce 6 cars or 6 computers.

  • Opportunity cost of 1 car = 1 computer (6 ÷ 6)

(Computers/Cars cause that’s what we want to find out)

COUNTRY A sacrifices LESS than B so has COMPARATIVE ADVANTAGE

How does specialisation increase prodcuctivity of labour

we become better at producing things when we each focus on a

limited range of activities

How does one become better in specialisation in labour

• learning by doing

• taking advantage of natural differences in skill and

talent

• economies of scale (when the average cost of

production decreases as you produce more

Explain economies of scale simply

Economies of scale occur when increasing production volume reduces the cost of producing each individual unit. By spreading fixed costs (like rent) over more products and buying materials in bulk, businesses save money. This allows larger companies to lower prices, improve efficiency, and gain a competitive advantage

How does producing more = cheaper per unit

-bulk

-spread of fixed costs

-etc. ig

• Buying in bulk – When a business buys large quantities of materials, suppliers often give discounts, so the cost per item goes down.

• Spreading fixed costs – Some costs (like rent, machinery, or salaries) stay the same no matter how much you produce. If you produce more units, these fixed costs are divided across more items, making the cost per unit lower.

Why does specialization work

Specialization works because markets (capitalist society) let people trade for what they don’t produce themselves.

What does ppf mean

-Acronym

-definition

The Production Possibilities Frontier (PPF)

an economic graph representing the maximum, efficient combinations of two goods an economy can produce given limited resources and technology. I

What is the assumption with a straight line ppf

Assumption: constant opportunity cost

• Resources are equally productive in the production in meat

and maize production

• Assumption of increasing opportunity cost is discarde

Trick: when calculating Comparative advantage

Cost of A in terms of B

B goes on top

B/A