Gains to Trade. Two country model with constant costs Assume just two products and two countries. With constant costs, the PPCs are straight lines (first.

Slides:

Advertisements

Similar presentations

Introduction to Macroeconomics Chapter 2. Opportunity Cost, Specialization, and Trade.

Advertisements

EC 100 Class 3.

THE BASIC THEORY USING DEMAND AND SUPPLY

Comparative Advantage: Even if one person is better, i.e., more efficient, at producing all goods than another person, trade can still be profitable for.

When faced with SCARCITY of resources, decisions have to be made about how to use those resources Trade-offs Opportunity Costs.

Overview Introduction Setting up the Model Adding trade into the Model

International Trade Models Mercantilism; The Classical Theories: –The Principle of Absolute Advantage –The Principle of Comparative Advantage The Heckscher-Ohlin-Samuelson.

Comparative Advantage

Lucy’s Cuban- American husband drumming on the bongo.

Comparative Advantage and Trade Why do economies trade?

Supplementary notes Chapter 3. Unit Labor Requirements CWLabor supply Home12120 Foreign63240.

Eco Slide 4 After Midterm Exam 3. Opportunity Cost (OC) OC of X in terms of Y is the amount of Y you have to give up when producing one unit of.

International Trade and Comparative Advantage

Application: International trade

Trade Theory: The High Points

Insights and Review Humian adjustment (David Hume, ) An early equilibrium model Suppose one country enjoys a balance of trade surplus – –It’s.

Historical development of trade theory Mercantilism positive trade balance Absolute advantage (Adam Smith) Countries benefit from exporting what they make.

Comparative Advantage and Trade, Part 2

Of Microeconomics 3. The Production Possibilities Frontier and Gains From Trade* Akos Lada July 22nd 2014 * Slide content principally sourced from N.

Increasing cost model. Assumptions Two countries Two products Increasing costs = the cost per unit increases as output of that good increases.

Foundations of Modern Trade Theory: Comparative Advantage

INTERNATIONAL ECONOMICS Lecture 6 | Lucía Rodríguez | Why do countries trade? Some later answers.

Labor Productivity and Comparative Advantage:

© Pilot Publishing Company Ltd Chapter 10 International Trade I --- The Law of Comparative Advantage.

Chapter II: Comparative Advantage_David Ricado Lectured by: Mr. SOK Chanrithy.

© 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R Interdependence and the Gains from Trade E conomics P R I N C I P L.

Trade and Interdependence. Minutes needed to make one ounce of: Amount produced in 8 hours: MeatPotatoesMeatPotatoes Farmer60 min/oz.15 min/oz.8 oz.32.

Why Everybody Trades: Comparative Advantage

Specialization & Comparative Advantage Comparative Advantage.

McGraw-Hill/Irwin Copyright  2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4: Trade: Factor Availability and Factor Proportions.

The Classical Theory of International Trade ……. The Classical Theory of International Trade Adam Smith; John Stuart Mills; James Torrens; David Ricardo.

Ricardian Model A lesson in Comparative Advantage.

In Class – Week 2 Gains from Exchange Why do people willingly trade?

Chapter 3 Interdependence and the Gains from Trade.

Economic Models Mr. Barnett University High School AP Econ.

International Trade Trade between China and Italy ◦ China  makes everything cheaper, faster, better  why trade with Italy? Continuing growth of international.

U.S. PPF for Cars and T-Shirts Cars T-Shirts U.S has 50,000 Hours of Labor with which it can produce either cars.

Frank & Bernanke 3 rd edition, 2007 Ch. 2: Comparative Advantage: The Basis of Exchange.

The importance of international trade. Why trade?  1. Sell off unwanted surpluses.

UNIT VII INTERNATIONAL TRADE CHAPTER 17. STANDARDS Examine absolute and comparative advantage, and explain why most trade occurs because of comparative.

Comparative Advantage and the Gains from Trade © 2003 South-Western/Thomson Learning.

International Trade The Law of Comparative advantage Sec. 4.1.

Trade Analysis Analyzing Trade Problems using a 4-step process.

Trade. Trade and Geography Trade Geography can give a country or region advantages in production and in trade – The more resource a country has the more.

Chapter 3 The Economic Problem. Production Possibilities Curve (Frontier): Maximum amounts of 2 goods that can be produced at full employment of all resources.

SESSION 14: ABSOLUTE ADVANTAGE & COMPARATIVE ADVANTAGE Talking Points Absolute Advantage & Comparative Advantage 1. Trade increases the value society receives.

Why do nations trade?  The distribution of resources is uneven.  Efficient production requires different technologies or resource combinations.  Products.

Dolan, Microeconomics 4e, Ch. 15 Survey of Economics Edwin G. Dolan and Kevin C. Klein Best Value Textbooks 4 th edition Chapter 15 Global Trade and Trade.

International Trade. Trade-Offs  Sacrificing one good or service to produce or purchase another.  Opportunity Cost – Value of the next best alternative.

Lecture 2 : The law of Comparative Advantage Summary: 1.This chapter examined the development of trade theory from the mercantilists to Smith, Ricardo,

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. THE PRODUCTION POSSIBILITY MODEL, TRADE, AND GLOBALIZATION THE.

20a – The Gains from Trade This web quiz may appear as two pages on tablets and laptops. I recommend that you view it as one page by clicking on the open.

Comparative Advantage

Frank & Bernanke 3rd edition, 2007

International Trade and Trade Policy

Chapter 3 Interdependence & Gains from Trade

University of Hawai‘i at Mānoa Department of Economics

Comparative Advantage and the Gains from Trade

International Economics By Robert J. Carbaugh 9th Edition

International Economics By Robert J. Carbaugh 7th Edition

International Economics By Robert J. Carbaugh 9th Edition

20a – The Gains from Trade This web quiz may appear as two pages on tablets and laptops. I recommend that you view it as one page by clicking on the open.

Trade Analysis Analyzing Trade Problems using a 4-step process

Comparative Advantage

International Trade and Trade Policy

AP ECONOMICS: August 31 Learning Target In order to understand why people and countries specialize and trade, I will learn the principles of absolute.

International Trade Economics 101.

Production Possibilities Schedules

International Trade Economics 101.

Presentation transcript:

Gains to Trade

Two country model with constant costs Assume just two products and two countries. With constant costs, the PPCs are straight lines (first unit has same cost as last unit). Cost of each good is measured by the slope of the PPC in that country.

PPC for US

Opportunity cost in US For each unit of Beer that is produced, the US must give up one unit of Wine: 1B=1W. For each unit of Wine that is produced, the US must give up one unit of Beer: 1W=1B.

US outcome w/o trade One possible point on the US PPC is 100W and 100B. The US would only be at that specific point if its consumers valued Beer and Wine equally.

US outcome w/o trade

PPC for UK

Opportunity cost in UK For each unit of Beer that is produced, the UK must give up one third of a unit of Wine: 1B=1/3W. For each unit of Wine that is produced, the UK must give up three units of Beer: 1W=3B.

Outcome in UK w/o trade One possible point on the UK PPC is 150B and 50W.

UK outcome w/o trade

Comparative advantage The cost of producing one unit of Beer equals one unit of Wine in the US and one third unit of Wine in the UK, so UK has the comparative advantage in Beer. The cost of producing one unit of Wine equals one unit of Beer in the US and three units of Beer in the UK, so US has the comparative advantage in Wine.

Comparative Advantage Cost per case of Beer Cost per case of Wine US UK 1 case of Wine 1 case of Beer 1/3 case of Wine 3 cases of Beer

Prices w/o trade Without trade, relative prices in each country will be based on the costs of production. If producing a case of Wine requires three times the amount of resources as a case of Beer (as in the UK), the price of Wine will be three times higher than the price of Beer.

Prices w/o trade Price of BeerPrice of Wine US UK $10 £2£6

Profiting from trade Buy a case of Wine in the US for $10 Export the Wine to the UK and sell for £6 Use the £6 to buy three cases of Beer Import the Beer to the US and sell for $30

Specialization & Trade US specializes in Wine and trades some of it with UK for Beer. UK specializes in Beer and trades some of it with the US for Wine. Terms of trade will be between the ratios in each country before trade. In this case, 1W=2B is between 1W=1B (in US) and 1W=3B (in UK).

Outcome with trade at one Wine for two Beer

US before & after trade Before trade, the US produced and consumed 100W and 100B. After trade, the US produces 200W and 0B, but consumes 150W and 125B. With trade, US consumes more of both Beer and Wine.

UK before & after trade Before trade, the UK produced and consumed 150B and 50W. After trade, the UK produced 300B and 0W, but consumed 200B and 50W. With trade, the UK consumes the same amount of Wine and more Beer.