Macro Ex. 2 - Feb 6th Notes Ch. 9

Chapter 9 Overview

• Focus on Comparative Advantage and Trade

  • Introduction to key trade concepts: imports and exports.

Imports and Exports

• Definitions of Imports:

  • Imports: Goods and services bought domestically but produced in other countries.

  • Example: Products made in Mexico sold in the United States.

• Exports:

  • Exports: Goods and services produced domestically and sold in other countries.

  • Example: American-produced goods sold in China.

• Statistics:

  • China: Largest exporter, accounting for 11% of global exports.

  • The U.S.: Second largest with 9.8% of global exports.

• Trade Statistics:

  • U.S. imports exceed exports, leading to a trade deficit.

  • Exports contribute about 15% to U.S. GDP, which is the total economic output.

Trade Dynamics

• Net Importer Status:

  • Understand the implications of being the world’s largest importer and the second-largest exporter.

  • A significant portion of U.S. consumption is from domestic production, despite imports.

Comparative Advantage

• Definition:

  • Comparative advantage refers to the ability of a party to produce a good or service at a lower opportunity cost than others.

• Example of Comparative Advantage:

  • The U.S. and China produce smartphones and wheat:

    • Smartphones:

      • China can produce 4 smartphones per hour.

      • The U.S. can produce 6 smartphones per hour.

    • Wheat:

      • China can produce 2 bushels per hour.

      • The U.S. can produce 12 bushels per hour.

• Absolute Advantage:

  • U.S. has an absolute advantage in both goods:

    • Smartphones: 6 per hour (U.S.) vs. 4 (China).

    • Wheat: 12 per hour (U.S.) vs. 2 (China).

• Opportunity Cost Calculation:

  • To determine comparative advantage, calculate the opportunity cost for each good in both countries.

  • For U.S.: Opportunity cost of 1 smartphone = 2 bushels of wheat.

  • For China: Opportunity cost of 1 smartphone = 0.5 bushels of wheat.

  • China has a comparative advantage in smartphones, while the U.S. has a comparative advantage in wheat.

Autarky

• Definition:

  • Autarky refers to a situation where a country does not trade with others (closed economy).

  • Countries can allocate labor for producing both goods (smartphones and wheat) and analyze output per labor hour.

Terms of Trade

• Definition:

  • Terms of trade refer to the ratio at which countries exchange goods.

• Mutual Gains from Trade:

  • Discuss the significance of beneficial terms of trade for both countries to encourage trade agreements.

  • Example: China may be willing to trade 1.5 smartphones for 1 bushel of wheat, benefiting both.

Specialization and Trade Benefits

• Complete Specialization:

  • Hypothetical scenario where China specializes entirely in smartphone production, gaining 4,000 smartphones.

  • The U.S. specializes in wheat production, gaining 12,000 bushels.

• Post-Trade Analysis:

  • After agreeing to trade certain quantities, both countries can achieve more than they could without trade.

Real-World Considerations

• Limitations of Complete Specialization:

  • Not all goods can be traded internationally (e.g., services like haircuts).

  • Production often faces increasing opportunity costs, which limits specialization.

• Preferences and Market Demand:

  • Different tastes in products can affect specialization (e.g., U.S. produces larger vehicles while other countries focus on smaller, fuel-efficient cars).

Sources of Comparative Advantage

• Factors Influencing Comparative Advantage:

  • Climate and natural resources (e.g., Costa Rica for bananas).

  • Labor skill levels (e.g., U.S. in high-skill tech vs. China in low-skill manufacturing).

  • Technological capabilities between countries.

External Economies and Industry Clusters

• Concentration of Industries:

  • Positive impact of firms clustering in a geographic area (e.g., Hollywood for movie production).

  • High-tech industries often form clusters, leading to increased innovation and efficiency.

Conclusion

• Chapter wraps up with insights into the importance and complexities of international trade, tariffs, and economic interdependence in the global economy.