ch.2 trade & trade-offs

Assumptions in the Ricardian Model​

1. labor is the only factor of production

2. labor quantity is fixed

3. 2 goods

4. 2 countries

5. tech is constant

PPF diagram

shows the combo. of 2 goods that are possible for a society to produce at full employment

• max. output of 2 goods

PPF helps us understand…

efficiency, OC, & economic growth (if graph shifted outwards)

OC is constant when…

PPF line is linear

2 possibilities that increase econ. growth

1. an increase in factors of production

2. better tech

theory of comparative advantage

produce things you’re specialized in & buy everything else from others

country/individuals has comp. advantage

producing if OC < than other countries/ppl

lower OC;

comp advantage

Comparative Advantage in Jet Production

Countries: USA vs. Brazil

Questions:

• USA & Brazil have comp. advantages in what jets?

• mutually beneficial terms of trade?

• Explanations

1. USA

   • 1L = 1.33s

   • 1s = 0.75L

2. Brazil

   • 1L = 3s

   • 1s = 0.33L

3. MBToT: 1L = (1.34 - 2.99)s

4. Brazil (lower OC for small jets (0.33L))

   • doesn’t want to give up small jets

   • Goal: want to produce as many “s” & trade for “L”

5. USA (lower OC for large jets (0.75L))

   • willing to give up small jets

   • Goal: want to produce “L” & trade them for “s”

GDP formula

= C + Ig + G + Xn

• C: Household consumption

• Ig: Investments by businesses

• G: Gov spending

• Xn: Net exports (E - I)