Lecture 4  Economic Growth  Trade and Specialization  An Introduction to Markets.

Economic Growth  Economic growth is illustrated by an economies expansion in production over time.

Economic Growth  The Cost of Economic Growth  The development of new goods and better ways of producing goods and services is technological change.  The growth of capital resources is capital accumulation. Does economic growth allow us to avoid opportunity costs?

Economic Growth c Tapes (millions per month) Tape-making machines (per month) b a PPF 0

Tapes (millions per month) Economic Growth Tape-making machines (per month) c b a PPF 0 If we allocate no resources to machines, we can make 5 million tapes a month (a).

Economic Growth c However, if we produce 6 machines a month (b), then the PPF rotates. We will be able to produce more tapes in the future Tapes (millions per month) Tape-making machines (per month) b a PPF 0

Economic Growth Tape-making machines (per month) c Tapes (millions per month) b a PPF 0 PPF 1 However, if we produce 6 machines a month (b), then the PPF rotates. We will be able to produce more tapes in the future. b' a'

Economic Growth c Regardless, we still incur an opportunity cost. We had to decrease the number of tapes produced from 5 to 3 million in order to produce more machines Tapes (millions per month) Tape-making machines (per month) b a PPF 0 PPF 1 b' a'

Economic Growth in the United States and Hong Kong  Since 1960, Hong Kong has grown more rapidly than the United States  Hong Kong has devoted a bigger fraction of its resources to accumulating capital.

Economic Growth in the United States and Hong Kong Consumption goods (per person) Capital goods (per person) a a Hong Kong in 1960 United States in 1960

Economic Growth in the United States and Hong Kong Consumption goods (per person) Capital goods (per person) a a c b Hong Kong in 1960 United States and Hong Kong in 1997 United States in 1960

Choices for HS Graduate ED consumption hs choices college grad choices current consumption can influence future choices

Gains from Trade  Comparative Advantage  A person or nation has a comparative advantage in an activity if they/it can perform an activity at a lower opportunity cost than others.  Why is there a difference? Differences in abilities Differences in resource characteristics

Comparative Advantage  Tom’s Factory  Can produce 4,000 lengths of tape/hour or  Can produce 1,333 cases/hour  Opportunity Cost  To produce 1 case, he must decrease tape production by 3 lengths — opportunity cost.  To produce 1 length of tape, he must decrease case production by case — opportunity cost.

Comparative Advantage Tape (thousands of lengths per hour) Cases (thousands per hour) Tom’s PPF Tom’s opportunity cost: 1 tape costs 1/3 case, and 1 case costs 3 tapes

Comparative Advantage  Nancy’s Factory  Can produce 1,333 lengths of tape/hour or  Can produce 4,000 cases/hour  Opportunity Cost  To produce 1 case, she must decrease tape production by lengths — opportunity cost.  To produce 1 length of tape, she must decrease case production by 3 cases — opportunity cost.

Comparative Advantage Tape (thousands of lengths per hour) Cases (thousands per hour) Nancy’s PPF Nancy’s PPF Nancy’s opportunity cost: 1 tape costs 3 cases, and 1 case costs 1/3 tape

Comparative Advantage Tape (thousands of lengths per hour) Cases (thousands per hour) Nancy’s PPF Nancy’s PPF 1 Tom’s PPF

Comparative Advantage Tape (thousands of lengths per hour) Cases (thousands per hour) Nancy’s PPF Nancy’s PPF 1 Tom’s PPF 4 b' b c a Nancy’s opportunity cost: 1 tape costs 3 cases, and 1 case costs 1/3 tape Tom’s opportunity cost: 1 tape costs 1/3 case, and 1 case costs 3 tapes Trade line

Comparative Advantage Tape (thousands of lengths per hour) Cases (thousands per hour) Nancy’s PPF Nancy’s PPF 1 Tom’s PPF 4 b' b c a Nancy’s opportunity cost: 1 tape costs 3 cases, and 1 case costs 1/3 tape Tom’s opportunity cost: 1 tape costs 1/3 case, and 1 case costs 3 tapes Trade line

Absolute Advantage  An absolute advantage exists when a person or nation can produce more of a good than another.  Individuals and nations can have absolute advantages in any or all goods.  However, it is not possible to have a comparative advantage in everything.

The Market Economy  Two key social institutions organize trade among nations.  Property rights Real Financial Intellectual

The Market Economy  Two key social institutions organize trade among nations.  Markets A market is any arrangement that enables buyers and sellers to get information and to do business with each other.

Circular Flows in the Market Economy

The Market Economy  Coordinating Decisions  Markets coordinate individual decisions through price adjustments.

Role of Economics in Action  You must work with EIA to reinforce your understanding of trade and specialization  The exam will reflect the tutorial and review questions in chapter 3 of EIA