Principles of economics Interdependence and the gains from trade. Những nguyên lý trong kinh tế học Sự phụ thuộc lẫn nhau Interdependence và ích lợi của thương mại giữa các quốc gia trên thế giới với nhau the gains from trade.
Principles of Economics Session II Interdependence and the Gains from Trade Overview Why do people – and nations – choose to be economically interdependent? How can trade make everyone better off? What is absolute advantage? What is comparative advantage? How are these concepts similar? How are they different? Learning Objectives By the end of this session, students should understand: – how everyone can benefit when people trade with one another. – the meaning of absolute advantage and comparative advantage. – how comparative advantage explains the gains from trade. – how to apply the theory of comparative advantage to everyday life and national policy. 2 Principles of Economics Part I Interdependence 4 Interdependence One of the Ten Principles from Session I: Trade can make everyone better off. We now learn why people – and nations – choose to be interdependent, and how they can gain from trade. Our Example Two countries: the U.S. and Korea Two goods: computers and wheat One resource: labor, measured in hours We will look at how much of both goods each country produces and consumes under two scenarios – Scenario I: if the country chooses to be self- sufficient – Scenario II: if it trades with the other country 5 Principles of Economics Part I Scenario I: Without Trade The U.S. PPF Production Possibility Frontier (PPF): represents production tradeoffs of an economy. In this example, we assume that –The U.S. has 50,000 hours of labor available for production, per month. –Producing one computer requires 100 hours of labor. –Producing one ton of wheat requires 10 hours of labor. 7 The U.S. PPF 8 4,000 100 5,000 2,000 1,000 3,000 500 200 300 400 0 Computers Wheat (tons) The U.S. has enough labor to produce 500 computers, or 5000 tons of wheat, or any combination along the PPF. Source: Mankiw (2011) The U.S. PPF Without Trade 9 4,000 100 5,000 2,000 1,000 3,000 500 200 300 400 0 Computers Wheat (tons) Suppose the U.S. uses half its labor to produce each of the two goods. Then it will produce and consume 250 computers and 2500 tons of wheat. Source: Mankiw (2011) [...]... With Trade Wheat (tons) produced + imported – exported = amount consumed 2,000 computers 240 0 110 wheat 0 700 0 130 700 1,000 0 Computers 100 Source: Mankiw (2011, modified) 200 300 20 Trade Makes Both Countries Better Off U.S consumption without trade consumption gains from with trade trade computers 250 270 20 wheat 2,500 2,700 200 Korea consumption without trade consumption gains from with trade trade... Do These Gains Come From? Absolute advantage: the ability to produce a good using fewer inputs than another producer measures the cost of a good in terms of the inputs required to produce it The U.S has an absolute advantage in both goods! So why does Korea specialize in computers? Why do both countries gain from trade? 23 Opportunity Cost and Comparative Advantage Comparative advantage: the. .. U.S consumers get 250 computers and 2500 tons wheat – Korean consumers get 120 computers and 600 tons wheat We will compare consumption without trade to consumption with trade First, we need to see how much of each good is produced and traded by the two countries 13 Principles of Economics Part II Scenario II: With Trade Exercise II-2: Production with Trade 1 Suppose the U.S produces 3400 tons of wheat... coffee – Brazil’s opp cost of wine is five pounds of coffee 28 Quiz: True or False? 1 Interdependence among individuals and interdependence among nations are both based on the gains from trade 2 Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes Mina can complete an oil change in 30 minutes and she can write a poem in 90 minutes Jake's opportunity cost of writing a poem... opportunity cost of writing a poem Quiz Answer: True or False? 1 Interdependence among individuals and interdependence among nations are both based on the gains from trade True Quiz Answer: True or False? (cont’d) 2 Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes Mina can complete an oil change in 30 minutes and she can write a poem in 90 minutes Jake's opportunity cost... Summary Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods & services Comparative advantage means being able to produce a good at a lower opportunity cost Absolute advantage means being able to produce a good with fewer inputs When people – or countries – specialize in the goods in which they have a comparative advantage, the economic “pie” grows and trade can... Consumption With Trade Suppose the U.S exports 700 tons of wheat to Korea, and imports 110 computers from Korea (So, Korea imports 700 tons of wheat and exports 110 computers.) How much of each good is consumed in the U.S.? Plot this combination on the U.S PPF How much of each good is consumed in Korea? Plot this combination on Korea’s PPF 18 Exercise II-3 Answer: U.S Consumption With Trade Wheat (tons)... combination along the PPF 2,000 1,000 0 Computers 100 Source: Mankiw (2011, modified) 200 300 11 Exercise II-1 Answer: Korea Without Trade Wheat (tons) Suppose Korea uses half its labor to produce each good Then it will produce and consume 120 computers and 600 tons of wheat 2,000 1,000 0 Computers 100 Source: Mankiw (2013, modified) 200 300 12 Consumption Without Trade Without trade, – U.S consumers... Comparative Advantage Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer Which country has the comparative advantage in computers? 24 Opportunity Cost and Comparative Advantage The opportunity cost of a computer is – 10 tons of wheat in the U.S., because producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat... tons of wheat How many computers would the U.S be able to produce with its remaining labor? Draw the point representing this combination of computers and wheat on the U.S PPF 2 Suppose Korea produces 240 computers How many tons of wheat would Korea be able to produce with its remaining labor? Draw this point on Korea’s PPF 15 Exercise II-2 Answer: U.S Production With Trade Wheat (tons) Producing 3400 tons . trade with one another. – the meaning of absolute advantage and comparative advantage. – how comparative advantage explains the gains from trade. – how to apply the theory of comparative. of Economics Session II Interdependence and the Gains from Trade Overview Why do people – and nations – choose to be economically interdependent? How can trade make everyone better. learn why people – and nations – choose to be interdependent, and how they can gain from trade. Our Example Two countries: the U.S. and Korea Two goods: computers and wheat One resource: