Macro Exam 2 - Feb 11 recording notes Ch. 9

Assignment Overview

• The session focuses on Chapter 9, Assignment 4 with prior discussions.

• Solutions for the assignment and Gradebook updates already available on Canvas.

Exam Preparation

• Exam Number Two review took place prior to the class.

• Small issues with exam content noted to avoid mistakes in grading.

• Students encouraged to familiarize themselves with the assignment problems, particularly those appearing on the exam.

Key Problem: Output Per Worker

• Presents a comparison of two industries in China and Pakistan producing earrings and shoes.

• China's output:

  • 8 earrings per hour

  • 4 pairs of shoes per hour

• Pakistan’s output:

  • 2 earrings per hour

  • 4 pairs of shoes per hour

• Additional anecdote about lost shoes observed on roads.

Opportunity Cost Calculation

• Opportunity cost reflects the real cost of producing one more unit of a good.

• China’s opportunity cost for earrings:

  • 1 earring = 0.5 pairs of shoes (calculation: 4 shoes/8 earrings)

• Pakistan’s opportunity cost for earrings:

  • 1 earring = 2 pairs of shoes (calculation: 4 shoes/2 earrings)

• Opportunity cost for shoes:

  • China: 1 pair of shoes = 2 earrings (calculation: 8 earrings/4 shoes)

  • Pakistan: 1 pair of shoes = 0.5 earrings (calculation: 2 earrings/4 shoes)

Comparative Advantage

• Comparative advantage determines which country should produce which good.

• China has a comparative advantage in earrings (0.5 < 2).

• Pakistan has a comparative advantage in shoes (0.5 < 2).

Autarky Scenario

• Autarky implies no trade; each country solely consumes what it produces.

• Each country has 1,000 labor hours, with a split of 500 hours to each good:

  • China:

    • Earrings: 4,000 produced (8 earrings x 500 hours)

    • Shoes: 2,000 produced (4 shoes x 500 hours)

  • Pakistan:

    • Earrings: 1,000 produced (2 earrings x 500 hours)

    • Shoes: 2,000 produced (4 shoes x 500 hours)

Trade and Specialization

• Trade specialization leads to higher overall production.

• If both countries specialize:

  • China would focus on earrings: Producing 8,000 earrings (8 earrings x 1,000 hours).

  • Pakistan would focus on shoes: Producing 4,000 shoes (4 shoes x 1,000 hours).

After Trade Consumption

• Terms of trade: China trades 2,000 earrings for 2,000 pairs of shoes from Pakistan.

• Following trade:

  • China ends up with 6,000 earrings and 2,000 shoes.

  • Pakistan ends up with 2,000 earrings and 2,000 shoes.

Economic Surplus and Trade Benefits

• Free trade is without government restrictions, yielding better economic outcomes for consumers and producers.

• Consumers generally benefit from lower prices on goods due to international trade.

• Surplus calculations:

  • Economic surplus combines consumer surplus and producer surplus.

  • Any reduction in economic surplus represents a deadweight loss.

Arguments Against Trade Policies

• Some industries lobby for tariffs and quotas to protect jobs, leading to inefficiencies in the economy.

• Estimated high costs per job maintained through tariffs (e.g., sugar, tires, and steel tariffs).

• Restrictive policies harm overall economic welfare despite benefiting a small number of workers.

International Trade Concepts

• Trade restrictions often create inefficiencies, leading to potential deadweight loss.

• Economic theory suggests that unilaterally reducing trade barriers, even without reciprocity, would improve overall welfare.