L16 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 17: Trade and efficiency consumption with and without trade comparative and absolute advantage more general production possibilities the consequences of trade
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2 Trade and what it does airplanes T-shirts (millions) 40 80 120 160 200 240 2 4 6 8 10 airplanes T-shirts (millions) 40 80 120 160 200 240 2 4 6 8 10 PPF for US PPF for China suppose the US gives 1 airplane to China in return for 30 million T-shirts 1 20 1 40 new cons. point for US new cons. point for China where did I get that specific trade from? It is one of many possible trades.
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3 Determinants of trade: opportunity  costs of production The PPF shows the opportunity costs of producing one good (in terms of what we have to give up of the other good). corn 20 85 30 40 100 60 10 95 wheat A 2 1 at A: the cost of producing 1 add. unit of wheat is the loss of 2 units of corn B 1 5 at B: the cost of 1 add. unit of corn is the loss of 5 units of wheat
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4 Comparative and absolute advantage Compared with another nation, a nation has a comparative advantage in the production of a good if it has the lower opportunity costs of producing that good. Compared with another nation, a nation has an absolute advantage in the production of a good if it can produce more units of that good. The determinant of trade is a nation’s comparative advantage. Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition
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5 The PPF and comparative advantage 1000 of watches cars (millions) 40 80 120 160 200 240 2 4 6 8 10 1000 of watches cars (millions) 40 80 120 160 200 240 2 4 6 8 10 PPF for Germany PPF for Switzerland OC of 30 mill. cars is 1000 watches OC of 30 mill. cars is 3000 watches Switzerland’s opportunity cost of producing cars is higher. Germany has a comparative advantage in cars (as well as an absolute advantage in both goods). the | slope of the PPF | shows the OC of the good on the x-axis
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6 The PPF and comparative advantage 1000 of watches cars (millions) 40 80 120 160 200 240 2 4 6 8 10 1000 of watches cars (millions) 40 80 120 160 200 240 2 4 6 8 10 PPF for Germany PPF for Switzerland OC of 1000 watches is 30 mill. cars OC of 3000 watches is 30 mill. cars – therefore, OC of 1000 watches is 10 mill. cars
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