...Interdependence and the Gains from Trade 3 • You wake up to an alarm clock made in Korea. • You pour yourself orange juice made from Florida oranges and coffee from beans grown in Brazil. • You put on some clothes made of cotton grown in Georgia and sewn in factories in Thailand. • You watch the morning news broadcast from New York on your TV made in Japan. • You drive to class in a car made of parts manufactured in a half-dozen different countries. Copyright © 2004 South-Western Copyright © 2004 South-Western/Thomson Learning Interdependence and the Gains from Trade • . . . and you haven’t been up for more than two hours yet! • Remember, economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of its members. Copyright © 2004 South-Western Copyright © 2004 South-Western Interdependence and the Gains from Trade • How do we satisfy our wants and needs in a global economy? • We can be economically self-sufficient. • We can specialize and trade p with others, leading to economic interdependence. Interdependence and the Gains from Trade • Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. • But this gives rise to two questions: • Why is interdependence the norm? • What determines production and trade? Copyright © 2004 South-Western Copyright © 2004 South-Western 1 Interdependence and the Gains from Trade • Why is interdependence...
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...3’Interdependence and the Gains from trade’ In this chapter, I learn how the economy coordinates the activities of individuals or nation. To make a better understand, I conclude the contents of this chapter with nine questions which answers are key to the modern global economy. 1. What are opportunity costs? Are they part of the economic way of thinking? Opportunity costs ----the highest-valued alternative that must be forgone when a choice is made, are the forgone opportunities if the next best alternative. Choice means both gaining something and giving up something. When you choose one option, you forgo all others. The benefits of the next best alternative are the opportunity costs of your choice. Opportunity costs are part of every decision and activity. Each choice means giving up something else. a. Opportunity costs are the benefits that are forgone as a result of a choice. When you choose one thing, you must give up—forgo—others. b. Opportunity costs are an individual concept but can be used to demonstrate scarcity and choice for a society as a whole. 2. What is comparative advantage? Comparative advantage: the ability to produce a good or service at a lower opportunity cost than another producer. Comparative advantage exists whenever one person (firm, region, or nation) will specialize in the production of the good or service that has the lowest opportunity cost. 3. Why does specialization occur? Comparative advantage accounts for specialization...
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...Exercise 2 Solution Chapter 2 Trade-offs, Comparative Advantage, and the Market System 2.1 Production Possibilities Frontiers and Opportunity Costs 1) Scarcity A) stems from the incompatibility between limited resources and unlimited wants. B) can be overcome by discovering new resources. C) can be eliminated by rationing products. D) is a bigger problem in market economies than in socialist economies. Answer: A Comment: Recurring Diff: 2 Page Ref: 38/38 Topic: Scarcity Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs AACSB: Reflective Thinking Special Feature: None 2) The principle of opportunity cost is that A) in a market economy, taking advantage of profitable opportunities involves some money cost. B) the economic cost of using a factor of production is the alternative use of that factor that is given up. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application. Answer: B Comment: Recurring Diff: 3 Page Ref: 38/38 Topic: Opportunity Cost Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs AACSB: Reflective Thinking Special Feature: None 3) The production possibilities frontier model shows that A) if consumers decide to buy more of a product its price will increase...
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...Outline I. Introduction II. International Trade Versus Interregional Trade ( international trade occurs for the same reasons as interregional trade ( gains from technology and gains from trade III. Trade in an Individual Product ( trade in cloth (U.S./India) — Figure 2.1 ( supply and demand ( the effects on India and the U.S. IV. Trade Based on Absolute Advantage A. Absolute Advantage ( PASSPORT: Football Games, Rats, and Economic Theory ( PASSPORT: Mercantilism ( Table 2.1 B. The Gains from Specialization and Trade with Absolute Advantage ( gains from trade — Table 2.2 ( the labor theory of value V. Trade Based on Comparative Advantage A. Comparative Advantage ( Table 2.3 ( David Ricardo ( Babe Ruth B. The Gains from Specialization and Trade with Comparative Advantage ( PASSPORT: Principal Exports of Selected Countries — Table 2.4 ( Change in world output — Table 2.5 VI. Trade Based on Opportunity Costs A. Opportunity Costs ( PASSPORT: Labor Costs as a Source of Comparative Advantage — Table 2.6 B. The Gains from Specialization and Trade with Opportunity Costs ( Table 2.7 ( Autarky VII. The Production Possibilities Frontier and Constant Costs A. The Production Possibilities Frontier...
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...milion | b) Graph the production possibilities frontiers for the American and Japanese economies. USA Production Possibilities Frontier JAPAN Production Possibilities Frontier c) For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1. | Opportunity Cost of: | | 1 car | 1 tons of grain | USA | 5/2 tons of grain | 2/5 cars | JAPAN | 5/4 tons of grain | 4/5 cars | d) Which country has an absolute advantage in producing cars? In producing grain? In producing cars both countries have absolute advantage because each worker in these countries produces 4 cars/year. But in producing grain USA has an absolute advantage because in 1 year a worker produces 10 tons of grain instead of the JAPAN worker who produces 5 tons of grain. e) Which country has a comparative advantage in producing cars? In producing grain? USA has a lower opportunity cost of producing grain than JAPAN: A ton of grain costs USA only 2/5 cars, but it costs JAPAN...
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... Weighing Opportunity Costs In our first week of Microeconomics we are looking closely at a specific scenario. We will use what we read and what we learned the first week, about the basics of Microeconomics. We will look closely at opportunity costs and at comparative advantages. The scenario this week is as follows. Two people, Michelle and James live alone in an isolated region. They each have the same resources available and they grow potatoes and raise chickens. If Michelle decides to use all her resources growing potatoes, she can grow about 200 pounds a year. If she devotes all her resources to raising chickens, she can raise 50 a year. If James devotes all his resources to growing potatoes, he can grow 80 pounds a year. If he devotes all his resources to raising chickens, he can raise 40 a year. Now we will answer a few specific questions about the scenario. What is Michelle’s opportunity of producing potatoes? The opportunity cost of producing potatoes, if all resources are used, is not raising any chickens. If Michelle used all resources to grow the potatoes, no resources would be left to raise chickens. What is Michelle’s opportunity cost of raising chickens? If Michelle decides to use all resources to raise chickens, her opportunity cost would be growing potatoes. If she uses all resources to raise chickens, nothing would be left over to grow potatoes. What is James’ opportunity cost of producing potatoes? His opportunity cost of producing potatoes...
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...the economic concepts of opportunity costs, absolute and comparative advantages as well as the purpose of trades. The paper takes a scenario and using the data, analyzes the opportunity costs each person achieves as well as who has the absolute and comparative advantages between both products of corn and pigs. Also, using research from the book and the internet, I was able to tie in these concepts to international businesses and nations alike, determine the important of these concepts in the economy. Opportunity costs are the true cost of anything that you have to give up (Krugman, 2009). We face decisions with the concept of opportunity costs in mind on a day to day basis; deciding whether to spend money on lunch or save it for another time. The opportunity costs in this situation are to have lunch to eat while giving up savings you can use for later. According to the scenario given between Mary and John which both produces corn and pigs, we can see that for Mary, the opportunity cost for producing corn are ¼ pigs. We came to this deduction by taking the total amount of corn and dividing into 1. Taking the result of this number we multiply by the amount of pigs that’s produced. Mary can produce 200 corns per year or 50 pigs per year if all her resources are allocated respectively to either corn or pigs. Using the formula mentioned, we come up with ((1/200)*50) which results to .25 pigs. To find the opportunity cost of Mary producing pigs...
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...Introduction In this paper I will explore the concepts of microeconomics. As well as define the opportunity cost for both Michelle’s and James’ in relation to producing potatoes and chickens. And I will explore based upon opportunity cost the absolute advantage in producing potatoes and chickens. Opportunity cost of producing potatoes Michelle 200 Potatoes= 50 Chickens~ 1 Potato= 1/200*50=0.25 Chickens Michelle’s opportunity cost of producing potatoes is 0.25(1/4) chickens. James 80 Potatoes= 40 Chickens~1 Potato=1/80*40=0.5 Chickens James’ opportunity cost of producing potatoes is 0.5 (1/2) chickens. Opportunity cost of producing chickens Michelle 50 Chickens=200 Potatoes~1 Chicken= 1/50*200= 4 Potatoes Michelle’s opportunity cost of producing Chickens is 4 Potatoes. James 40 Chickens= 80 Potatoes~1 Chicken=1/40*80= 2 Potatoes James’ opportunity cost of producing Chickens is 2 Potatoes. Absolute Advantage In this scenario, Michelle has the absolute advantage due to the fact that Michelle can produce more potatoes and chickens than James can produce. Comparative Advantage for Potatoes Michelle, 200 Potatoes =50 Chickens~200/200P=50/200C~1P=0.25C (1/4C) James, 80 Potatoes=40 Chickens~80/80P=40/80C~1P=0.5C (1/2C) In the instance of Potatoes, since Michelle has a lower opportunity cost to produce potatoes she has the comparative advantage. Comparative Advantage for Chickens Michelle, 50 Chickens=200 Potatoes~50/50C=200/50P~1C=4 Potatoes James,...
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...Productivity and Comparative Advantage - The Ricardian Model Explanations: Opportunity cost; comparative advantage; Parper labor argument; derived demand; Gains from trade; absolute advantage; Unit labor requirement; nontraded goods. Multiple Choice Questions 1. Countries trade with each other because they are _______ and because of ______. A. different, costs B. similar, scale economies C. different, scale economies D. similar, costs E. None of the above. 2. Trade between two countries can benefit both countries if A. each country exports that good in which it has a comparative advantage. B. each country enjoys superior terms of trade. C. each country has a more elastic demand for the imported goods. D. each country has a more elastic supply for the supplied goods. E. Both C and D. 3. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if A. output per worker of widgets is higher in that country. B. that country's exchange rate is low. C. wage rates in that country are high. D. the output per worker of widgets as compared to the output of some other product is higher in that country. E. Both B and C. 4. In order to know whether a country has a comparative advantage in the production of one particular...
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...Chapter 2 The Economic Problem 2.1 Production Possibilities and Opportunity Cost 1) The production possibilities frontier A) is the boundary between attainable and unattainable levels of production. B) is the boundary between what we want to consume and what we want to produce. C) shows how production increases as prices rise. D) shows prices at which production is possible and impossible. E) illustrates why there need not be any scarcity in the world. Answer: A Diff: 1 Type: MC Topic: Production Possibilities and Opportunity Cost 2) Which one of the following concepts is not illustrated by a production possibilities frontier? A) scarcity B) monetary exchange C) opportunity cost D) attainable and unattainable points E) the tradeoff between producing one good versus another Answer: B Diff: 2 Type: MC Topic: Production Possibilities and Opportunity Cost 3) A point inside a production possibilities frontier A) indicates some unused or misallocated resources. B) is unattainable. C) is preferred to a point on the production possibilities frontier. D) indicates a point of production efficiency. E) illustrates the idea of opportunity cost. Answer: A Diff: 1 Type: MC Topic: Production Possibilities and Opportunity Cost 4) Which one of the following concepts is illustrated by a production possibilities frontier? A) profit B) consumption C) investment D) monetary exchange E) the tradeoff between producing one good versus another ...
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...border wall and trade limitations with Mexico may have on the US. Leaders of the recent Republican campaign promised high paying manufacturing jobs by restrictive trade with Mexico and a border wall to prevent immigration. However, these actions may have unintended consequences. A tax on goods imported from Mexico is intended to be how the border wall is funded. Yet, it will more likely be the case that US consumers bear the tax. Dapice demonstrates this with an example in the housing market. If real estate taxes increase, owners of rentals are the ones to physically pay the tax; however, renters experience that tax in the form of increased monthly rent. As the price of the Mexican imports increases, US prices will increase to offset the tax; therefore, US consumers will pay the tax. Mexico is currently the third largest US trading partner. In turn, they also import many goods from the US, making the two economies closely tied. Dapice points out that “Mexico’s imports from the US were 80 percent of their exports to the US in 2015.” Mexico’s economy also relies heavily on trade with the US. One goal...
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...International Trade International Trade Learning Team C November 15, 2010 ECO/212 Nancy Irizarry INTERNATIONAL TRADE International trade is very important to a global economy. When countries can trade products and services that they produce with other nations without obstacles, it creates a robust economy for those exporting and importing their products and services. However, there has to be a balance between the nations to prevent protectionism, isolationism and high tariffs on imports, which can lead to trade wars. The debate over free trade and tariffs is a very complicated process as evident with the creation of the World Trade Organization (WTO). “The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. The goal is to help producers of goods and services, exporters, and importers conduct their business” (WTO, 2010, p.1) Free trade has its advantages and disadvantages. The advantages and disadvantages depends on the frame of thought regarding trade. Within the simulation for international trade, one such advantage was the ability of a country to have a comparative advantage over another . When speaking in terms of a comparative advantage, its referring to a nations ability to produce a product or service at a lower price than another nation. Producing a product or service at a lower cost is the foundation of international trade. All countries who trade have the comparative...
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...Comparative Advantage and Absolute Advantage ______________________________________________________________________________________________ absolute advantage: A country, individual, or firm has an absolute advantage in producing a good if production of the good absorbs fewer resources (or less time, in the case of an individual) than are required in other countries or by other individuals or firms. comparative advantage: A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good. ______________________________________________________________________________________________ Comparative Advantage The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade. This law applies to all exchanges, whether between individuals or nations. Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods...
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...International Trade Simulation and Report Taruh Cravens, Melody Jones, Geneva George-Williams, Ruby Morgan, Nicole Southerland ECO/212 Blake Bennett International Trade Simulation and Report This paper is a team correlation on the knowledge gained from our course of study and how the concepts are applied, how international trade affects the U.S, economy, and addresses the four key factors from our weekly reading assignments that are shown in the stimulation. The simulation identified Rodamia’s bordering countries provide an opportunity for international trade and investments that could greatly benefit Rodamia. International trade with other countries would give consumers more choices in price and quality of goods. The domestic producers would increase production to meet market demands in other countries, producing more capital for investing in new avenues. The interaction of trade between the countries will make the countries more vibrant and wealthier. Limitations of international trade are placed in the form of tariffs, quotas, and regulations. These limitations offer protection in certain circumstances but can have negative if used to retaliate for reasons such as political differences (Colander, 2004). The simulation emphasized four key points from the team’s weekly reading assignments, including comparative advantage, the principle of increasing marginal opportunity, the protection possibility curve, and limitations on international trade. The...
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...and Comparative Advantage: The Ricardian Model Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Preview • • • • • • • • Opportunity costs and comparative advantage Production possibilities Relative supply, relative demand & relative prices Trade possibilities and gains from trade Wages and trade Misconceptions about comparative advantage Transportation costs and non-traded goods Empirical evidence Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-2 Introduction • Sources of differences across countries that lead to gains from trade: – The Ricardian model (Chapter 3) examines differences in the productivity of labor (due to differences in technology) between countries. – The Heckscher-Ohlin model (Chapter 5) examines differences in labor, labor skills, physical capital, land, or other factors of production between countries. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-3 Ricardian Model Assumptions 1. Two countries: domestic and foreign. 2. Two goods: wine and cheese. 3. Labor is the only resource needed for production. 4. Labor productivity is constant. 5. Labor productivity varies across countries due to differences in technology. 6. The supply of labor in each country is constant. 7. Labor markets are competitive. 8. Workers are mobile across sectors. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-4 Comparative Advantage • Suppose that the domestic country has a comparative advantage in cheese production:...
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