1. ETP Economics 101 Lecturer: Jack Wu
Gains from Trade
ETP Economics 101
Lecturer: Jack Wu

2. AUTARKY (自給自足)OR TRADE?
How do we satisfy our wants and needs in a global economy?
We can be economically self-sufficient (Autarky).
We can specialize and trade with others, leading to economic interdependence.

3. Case 1: The Simplest Economy
only two goods: potatoes and meat
only two people: a potato farmer and a cattle rancher
Each only works 8 hours/day
What should each produce?
Why should they trade?

4. Case 1 (continued) Minutes needed to make 1 ounce of
___________________________________
Meat Potatoes
Farmer min/oz min/oz
Rancher min/oz min/oz

5. Case 1 (continued) Amounts produced in 8 hours
___________________________________
Meat Potatoes
Farmer oz oz
Rancher oz oz

6. The Farmer’s Production Possibilities Frontier
(a) The Farmer ’
s Production Possibilities Frontier
Meat (ounces) 8 32
Potatoes (ounces)

7. The Rancher’s Production Possibilities Frontier
(b) The Rancher ’
s Production Possibilities Frontier
Meat (ounces) 48 24
Potatoes (ounces)

8. OPPORTUNITY COST Definition
Whatever must be given up to obtain some item
Measures the trade-off between the two goods that each producer faces

9. Case 1(Continued): Opportunity Costs
1oz of meat
1oz of potatoes
Farmer
4 oz of potatoes
¼ oz of meat
Rancher
2 oz of potatoes
½ oz of meat

10. Absolute Advantage
The comparison among producers of a good according to their productivity—absolute advantage
Describes the productivity of one person, firm, or nation compared to that of another.
The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

11. Comparative Advantage
Compares producers of a good according to their opportunity cost.
Whatever must be given up to obtain some item
The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

12. APPLICATION Should Chien-Ming Wang mow his own lawn? Wang
Mow his lawn in 2 hours
Film a Taiwan TV commercial and earn NT$100,0000 (2 hours)

13. Quick Quiz 1 from Case 1 Who has the absolute advantage?
The farmer or the rancher?
Who has the comparative advantage?

14. Specialization and Trade
Comparative advantage and differences in opportunity costs are the basis for specialized production and trade.

15. Quick Quiz 2 from Case 1
What should farmer produce (or specialize in)?
What should rancher produce (or specialize in)?

16. Benefits of Trade
Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade.
Benefits of Trade
Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.

17. Self-Sufficiency (Autarky)
By ignoring each other:
Each consumes what they each produce.
The production possibilities frontier is also the consumption possibilities frontier.
Without trade, economic gains are diminished.

18. Self-Sufficiency (Autarky) in Case 1
Assume: Farmer spends 4 hours on meat and 4 hours on potatoes. Rancher spends 4 hours on meat and 4 hours on potatoes.

19. Case 1 (Continued): Without Trade
Production: Farmer produces 4 oz of meat and 16 oz of potatoes. Rancher produces 12 oz of meat and 24 oz of potatoes.
Consumption: Farmer consumes 4 oz of meat and 16 oz of potatoes. Rancher consumes 12 oz of meat and 24 oz of potatoes.

20. The Farmer’s Production and Consumption Without Trade
(a) The Farmer ’
s Production and Consumption
Meat (ounces)
Farmer's
production and
consumption
without trade 8 32 4 16 A
Potatoes (ounces)
Copyright©2003 Southwestern/Thomson Learning

21. The Rancher’s Production and Consumption Without Trade
(b) The Rancher ’
s Production and Consumption
Meat (ounces) 48 24
Rancher's
production and
consumption
without trade 12 24 B
Potatoes (ounces)
Copyright © South-Western

22. One Proposal for Specialization
Farmer devotes all his time to growing potatoes.
Rancher spends 6 hours a day raising cattle and 2 hours growing potatoes.

23. Production Under this Proposal
Farmer’s production with Specialization: 0 oz of meat and 32 oz of potatoes
Rancher’s production with Specialization: 18 oz of meat and 12 oz of potatoes.

24. Proposal for Trade The price of trade
Must lie between the two opportunity costs
Trade deal: Farmer gives rancher 15 oz of potatoes, and rancher gives farmer 5 oz of meat in return.
Note: Trade Price of Meat: 2~4 oz of potatoes
Note: Trade Price of Potatoes: 1/4 oz ~1/2 oz of meat

25. Consumption with Trade
Farmer’s consumption with trade: 5 oz of meat and 17 oz of potatoes
Rancher’s consumption with trade: 13 oz of meat and 27 oz of potatoes.

26. How Trade Expands the Farmer’s Set of Consumption Opportunities
(a) The Farmer ’
s Production and Consumption
Meat (ounces)
Farmer's
consumption
with trade
Farmer's
production and
consumption
without trade 8 32 A* 5 17 4 16 A
Farmer's
production
with trade
Potatoes (ounces)

27. How Trade Expands the Rancher’s Set of Consumption Opportunities
(b) The Rancher ’
s Production and Consumption
Meat (ounces)
Rancher's
production
with trade 48 24
Rancher's
consumption
with trade 12 18 13 27
Rancher's
production and
consumption
without trade B* 12 24 B
Potatoes (ounces)

28. Imports—goods produced abroad and sold domestically
International Trade
Each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off.
Imports—goods produced abroad and sold domestically
Exports—goods produced domestically and sold abroad

29. Quick Quiz 3
Martha and Stewart each spend 8 hours a day wallpapering and painting:
Hours needed to Do 1 Room
Paint Wallpaper
Martha hours/room hours/room
Stewart hours/room hours/room

30. QUESTIONS
Draw production possibility frontiers for both Martha and Stewart. (Painting on horizontal axis and Wallpaper on vertical axis)
Find out the opportunity costs.
Who has an absolute advantage in painting? Wallpapering? Why?
Who has a comparative advantage in painting? Wallpapering? Why?
To propose specialization and trade.
To show both gain from the proposed trade.