Ch 3 - Interdependence and Gains from Trade

what does trade do? (think of the principles)

trade makes everyone better off

define the production possibilities frontier

displays various mixes of output an economy can produce

draw the PPF

frank needs 60 min to produce 1 kg of meat and 15 min/kg for potatoes. ruby needs 20 min/kg of meat and 10 min/kg for potatoes.

amount produced in 8 hours:

frank: 8kg meat, 32 kg potatoes

ruby: 24kg meat, 48 kg potatoes

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[slide 7-8]

Draw Canada's PPF

▪ Canada has 50 000 hours of labour available for production per month.

▪ Producing one computer requires 100 hours of labour.

▪ Producing one tonne of wheat requires 10 hours of labour.

Computers appear on the horizontal axis.

Draw Japan's PPF

▪ Japan has 30 000 hours of labour available for production per month

▪ Producing one computer requires 125 hours of labour

▪ Producing one tonne of wheat requires 25 hours of labour

Computers appear on the horizontal axis

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Suppose Canada exports 700 tonnes of wheat to Japan and imports 110 computers from Japan. (Alternatively, Japan imports 700 tonnes of wheat and exports 110 computers.)

How much of each good is consumed in Canada?

▪ Plot this combination on Canada's PPF

▪ How much of each good is consumed in Japan?

▪ Plot this combination on Japan's PPF

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draw a table representing each country's consumption with/out trde, gains/loss

[slide 10-14, 20-23]

why is the PPF line linear?

the OC is the same - the allocation of labour can be equally adjusted

define absolute advantage

comparison among producers of a good according to their productivity (who can ultimately produce the most)

define comparative advantage

comparison among good's producers according to their opportunity cost (what is given up to obtain something else) (ex/ cheaper, less time/labour needed)

what happens when individuals specialize in producing their comparative advantage goods

total economic production rises

are gains from trade based on absolute advantage or comparative advantage?

comparative

how does one calculate and compare the opportunity costs of producing goods (use frank and ruby potatoes meet example)?

frank:

60 min/1 kg of meat

15 min/kg for potatoes.

ruby:

20 min/kg of meat

10 min/kg for potatoes.

amount produced in 8 hours:

frank: 8kg meat, 32 kg potatoes

ruby: 24kg meat, 48 kg potatoes

frank:

meat: OC = 4kg potatoes

potatoes: OC = 0.25 kg meat

ruby:

meat: OC = 2 kg potatoes

potatoes: OC = 0.5 kg meat

what is the relation between trade and comparative advantage?

trade benefits everyone, allows specialization in one's comparative advantage products

what determines the price at which trade takes place?

should goods be produced by the country that has a smaller or larger opportunity cost of producing that good? why?

smaller

what is the principle of comparative advantage?

goods should be produced by countries that have a smaller opportunity cost of producing it

what are net exports?

exports - imports

a nation will typically import goods in which...

other nations have a comparative advantage

joe can cook dinner in 30 minutes and wash laundry in 20 minutes. kayla takes twice as long to do each task. how should they allocate the work?

[DOUBLE CHECK ANSWERS] joe has the absolute advantage. their OC is the same, so there are no gains from trade.