E333_Ch2_pink

# E333_Ch2_pink - countries two industries • Factors will...

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Positive vs. Normative Analysis Positive Analysis: attempts to describe the world as it is. “What impact will raising the minimum wage have on teen unemployment?” Normative Analysis: how the world should be. “Should the federal minimum wage be raised?” 1

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Basic Model General Equilibrium All markets in equilibrium simultaneously Can observe all market sectors reactions to international trade ALL markets : huge model Simplifying assumptions 2
PPF 3 C C

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Example Solve PPF ( C 2 +3T = 36) for T 3T = 36 - C 2 T=12 -1/3C 2 Plot PPF points for C = 0 through C =6 Calculate opportunity Cost of increasing C 4 PPF A C=0 T=12 B 1 11 2/3 C 2 10 2/3 D 3 9 E 4 6 2/3 F 5 3 2/3 G 6 0 Op. Cost A to B - 1/3 T B to C - 1 T C to D - 1 2/3 T D to E - 2 1/3 T E to F - 3 T F to G - 3 2/3 T
Factor Mobility Assumption 6 Resources are perfectly mobile between a

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Unformatted text preview: countries two industries • Factors will receive the same payments across industries. 5 Indifference Curves cannot cross 6 C Example • U=C*T; C=20, T=5; so C,T=20,5 • U=20*5 = 100 • Everywhere on this indifference curve, U=100 • Another point would be C,T = 4,25 and C,T=5,20 • What is the slope between C=4 and C=5? – If C=4 then T=25 and if C=5, T=20 • (25-20)/(4-5) = -5/1 = -5 • Slope between C=19 and C=20? – At C=19, T = (100/19)=5.26 7 Budget Constraint (line) • P c C + P t T = M – M is income • Solve for T (vertical axis) • P t T= M - P c C • T = M/ P t - (P c /P t ) C • Slope – relative price of C! 8 Autarky: Constant Op. Cost 9 C Autarky: Increasing Op. Cost 10 C...
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E333_Ch2_pink - countries two industries • Factors will...

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