1. Last class: Today: Next class: Reading:
March 1
Last class:
Review of economic concepts and methods
Today:
Results of Quiz 3 and problem set 1
2. Review of economic concepts and methods
3. International trade theory
Next class:
Quiz 4 (section 2.7 only)
Reading:
2. Review of economic concepts

2. Class 13
March 1
Important date:

3. Result of Quiz 3
N = 39 Range = 3 – 10 Average = 8.95

4. Result of Problem Set 1
N = 36 Range = 39 – 98 Average = 81.2

5. 2. Review of economic concepts
2.1. An overview of an economy -- How does it work?
2.2. Demand and supply
2.3. Market equilibrium and price determination
2.4. Excess supply and excess demand
2.5. Consumer and producer surplus
2.6. Impacts of market interventions
2.7. International trade & price determination

6. 2.7. International trade & price determination
Two markets with no trade (handout)
-- Equilibrium in each market
-- CS and PS in each market
Free trade with zero transportation cost (handout)
-- An intuitive analysis
-- A graphic analysis
-- Exporting country:
Supply & demand ==> excess supply (ES)
-- Importing country: Supply and demand
Supply & demand ==> excess demand (ED)
-- International market:
ES = ED ==> trade price and quantity
-- Effects of trade

7. 2.7. International trade & price determination
Free trade and zero transportation cost
-- A mathematical analysis (see handout)
-- Export country  excess supply
-- Import country  excess demand
-- Trade: ES = ED
-- Effects of trade
-- Exporting country
Change in Qs, Qd, P, CS, PS, and (CS+PS)
-- Importing country

8. Effects of trade between two nations
(compared to the situation of no trade)
Exporting country Importing country
Domestic production:  
Domestic consumption:  
Market price:  
CS  
PS  
Total welfare (CS+PS):  

9. 2.7. International trade & price determination
Free trade with transportation cost (handout)
-- A graphic analysis
-- Exporting country:
Supply & demand ==> excess supply (ES)
-- Importing country: Supply and demand
Supply & demand ==> excess demand (ED)
-- International market:
Import price = export price + transport cost
ES = ED ==> trade prices and quantity
-- A mathematical analysis (see handout)

10. 2.7. International trade & price determination
Trade with an import tax:
The impacts of an import tax is the same as the impacts of transportation cost except that the importing country will collect tax revenue

11. Effects of an import tax (compared to the situation of free trade)
Exporting country Importing country
Domestic production:
Domestic consumption:
Market price: CS PS
Total welfare:

12. 3. International trade theory
3.1. Simple examples: two-person cases
3.2. Absolute and comparative advantages
3.3. Trade between two countries
3.4. The sources of comparative advantage
3.5. Other explanations for international trade
3.6. Measurement of the gains from trade
3.7. Exchange rate and its determination

13. 3.1. Simple examples -- two-person cases
Suppose Kevin and Mark have just completed the data collection and analysis for a group project and are ready to write the project report that will include 18 pages of text and 10 graphs. Here are the estimated rates for both Kevin and Mark:
Kevin Mark
Text pages/hr. 3 pages/hr.
Graphs graphs/hr. 1 graph/hr.
50/50 share with no specialization:
Kevin: 9 pages of text and 5 graphs ==> 7 hrs
Mark: 9 pages of text and 5 graphs ==> 8 hrs

14. 3.1. Simple examples -- two-person cases
With specialization:
For example:
Kevin: 8 graphs & 2 pages of text ==> 5 hrs
Mark: 2 graphs & 16 pages of text ==> 7.3 hrs OR
Kevin: 10 graphs and no text ==> 5 hrs
Mark: 18 page of text and no graph ==> 6 hrs
In this case, Kevin is more productive in graphs and Mark is more productive in text. When each person is more productive in one production, trade and specialization can benefit both of them.

15. 3.1. Simple examples -- two-person cases
Suppose Ashley and Helen are another group for the same project (18 pages of text and 10 graphs) with the following estimated rates:
Ashley Helen
Text pages/hr. 3 pages/hr.
Graphs graph/hr. 2 graphs/hr.
50/50 share with no specialization:
Ashley: 9 pages of text & 5 graphs ==> 9.5 hrs
Helen: 9 pages of text & 5 graphs ==> 5.5 hrs
Helen is more productive in both text & graphs but Ashley is
less productive in both text & graphs. Can specialization
benefit both of them?

16. 3.1. Simple examples -- two-person cases
With specialization:
Ashley: 14 pages of text & 2 graphs ==> 9 hrs
Helen: 4 pages of text & 8 graphs ==> 5.33 hrs OR
Ashley: 18 pages of text & no graph ==> 9 hrs
Helen: 10 graphs and no text ==> 5 hrs
Ashley is less productive in both text and graphs but is RELATIVELY more productive in preparing text (Helen is more productive in text & graphs and RELATIVELY more productive in graphs).

17. 3.1. Simple examples -- two-person cases
What can we conclude from the first two examples:
(1) When each person is more productive in one activity, specialization and trade can benefit both of them
(2) When each person is RELATIVELY more productive in one activity, specialization and
trade can benefit both of them.
What can we conclude from the third example
(David and John) on the next page?

18. 3.1. Simple examples -- two-person cases
David John
Text pages/hr. 3 pages/hr.
Graphs graphs/hr. 2 graphs/hr.
50/50 share with no specialization:
David: 9 pages of text & 5 graphs ==> 2.75 hrs
John: 9 pages of text & 5 graphs ==> 5.5 hrs
David is more productive in both text & graphs and
John is less productive in both text & graphs. Is John
RELATIVELY more productive in text or graphs?
For this example, we can not find a specialization that can benefit both David and John.