International Trade When individuals or countries specialize in the activity they do best, the overall economic pie increases.

International Trade Gains from trade are the reason our modern economy is characterized by a high degree of interdependence. Production possibility frontier – Ex: Robinson is on an island. He works for eight hours each day to produce food. He can either gather coconuts or fish. His trade-off is the production possibility frontier.

International Trade Robinson will select the combination of fish and coconuts that maximizes his satisfaction. All of the points on the production possibility frontier will be efficient because if he increases the quantity of one product then the other will decrease.

The Opportunity to Trade Crusoe is better at catching fish than Robinson and she is also better at gathering coconuts. She can catch 36 fish and thirty six coconuts. She has an absolute advantage at every point. One day Robinson finds a boat and sails to Crusoe’s island. They talk about their consumption patterns, and Robinson proposes that if they trade they can be better off.

Opportunity to Trade Crusoe is skeptical and doesn’t see the advantage. Robinson could devote eight hours to gathering coconuts and Crusoe could spend two more hours fishing, then their combined production could be three more fish and coconuts than before.

Comparative Advantage Comparative Advantage – When Robinson specializes in producing coconuts and Crusoe specializes in producing fish, then their collective economy can increase its total production. If trading partners differ in their comparative advantage, they can improve their overall well-being by specializing. The more extensive markets, then the greater opportunities for specializing and the larger gains from trade.

Political Economy of Trade Free trade expands the economy, it implies a shift in the size of different industries. Citizens who experience losses are opposed to freer trade. Producers benefit and consumers suffer when a country becomes an exporter. In total, social welfare increases. If a country becomes an importer then consumers benefit and producers suffer.

Profit Motive and the Behavior of Firms “Firm” – Economic actors who are responsible for supplying goods and services in the economy. According to the law of supply, as the price of a good rises, then firms are willing to supply a greater quantity.

Economic Profits Profits are defined as the difference between the firm’s total revenue and its total costs. Total revenue – total quantity of output the firm produces for sale multiplied by the price it receives for sale. Bob’s Bread Company – Bob sells 300 loaves per day for $4 a loaf. Bob pays $500 for flour an other ingredients, hiring labor is $250 per day, and renting the shop is $50 per day. The explicit costs are $800, leaving an accounting profit of $400 per day. Opportunity cost is $300 per day. Bob could make this managing another bread store. So Bob’s true economic profit is $100 per day.

International Trade Quiz 1. What is the production possibility frontier for Robinson? 2. All the points on Robinson’s PPF are efficient? T/F 3. How does Crusoe have an absolute advantage over Robinson? 4. Why should Crusoe trade with Robinson? 5. Producers benefit and consumers suffer when a country becomes an exporter. T/F 6. Define “firms”. 7. Define profits. 8. If Bob sells 300 loaves per day at $4 per loaf, then what are his total revenues? 9. What is Bob’s opportunity cost? 10. What is a business that you would like to own?