Chap7 - Global Specialization & International T...

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Unformatted text preview: Global Specialization & International T rade – Chapter 7 Econ 101.01 Fall 2011 Prof. Michael Potepan Answers to take-home exercise – Question 1 Answers to take-home exercise – Question 1 0 Answers to take-home exercise – Question 1 1 0 Answers to take-home exercise – Question 1 2 1 0 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 $175 $200 $225 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 $175 $200 $225 $100 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 $175 $200 $200 $225 $100 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 $175 $300 $200 $200 $225 $100 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $100 $125 $150 $400 $175 $300 $200 $200 $225 $100 Answers to take-home exercise – Question 1 7 6 5 4 3 2 1 0 $75 $700 $100 $600 $125 $500 $150 $400 $175 $300 $200 $200 $225 $100 Answers to take-home exercise – Question 1 $800 $700 Marginal Costs $600 $500 $400 $300 $200 $100 $0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Pollution Answers to take-home exercise – Question 1 $800 $700 Marginal Costs $600 $500 $400 $300 Marginal External Cost $200 $100 $0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Pollution Answers to take-home exercise – Question 1 $800 $700 Marginal Costs $600 $500 $400 $300 Marginal External Cost $200 Marginal Cost of Abatement $100 $0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Pollution Answers to take-home exercise – Question 1 $800 $700 Marginal Costs $600 $500 MEC = MCA $400 $300 Marginal External Cost $200 Marginal Cost of Abatement $100 $0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Pollution “optimal” pollution level Answers to take-home exercise – Question 1 Answers to take-home exercise – Question 1 MEC = $225; MCA = $100; efficient to reduce Answers to take-home exercise – Question 1 MEC = $225; MCA = $100; efficient to reduce MEC = $200; MCA = $200; just efficient to reduce Answers to take-home exercise – Question 1 MEC = $225; MCA = $100; Efficient to reduce MEC = $200; MCA = $200; Just efficient to reduce MEC = $175; MCA = $300; Not efficient to reduce Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 Pollution Polluter 1’s Total Abatement Cost = 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 Pollution Polluter 1’s Total Abatement Cost = 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = € 1 (3, 000 ∗ $15) = $22, 500 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = Polluter 2’s Total Abatement Cost = € 1 (3, 000 ∗ $15) = $22, 500 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = Polluter 2’s Total Abatement Cost = € 1 (3, 000 ∗ $15) = $22, 500 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (3, 000 ∗ $15) = $22, 500 2 Polluter 2’s Total Abatement Cost = 1 (3, 000 ∗ $30) = $45, 000 € € 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (3, 000 ∗ $15) = $22, 500 2 Polluter 2’s Total Abatement Cost = 1 (3, 000 ∗ $30) = $45, 000 € Society’s Total Abatement Cost = € 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 threshold $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (3, 000 ∗ $15) = $22, 500 2 Polluter 2’s Total Abatement Cost = 1 (3, 000 ∗ $30) = $45, 000 € Society’s Total Abatement Cost = € 2 $22, 500 + $45, 000 = $67, 500 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 Pollution 4,000 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 Pollution Polluter 1’s Total Abatement Cost = 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 Pollution Polluter 1’s Total Abatement Cost = 5,000 6,000 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = € 1 (4, 000 ∗ $20) = $40, 000 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = Polluter 2’s Total Abatement Cost = € 1 (4, 000 ∗ $20) = $40, 000 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = Polluter 2’s Total Abatement Cost = € 1 (4, 000 ∗ $20) = $40, 000 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (4, 000 ∗ $20) = $40, 000 2 Polluter 2’s Total Abatement Cost = 1 (2, 000 ∗ $20) = $20, 000 € € 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (4, 000 ∗ $20) = $40, 000 2 Polluter 2’s Total Abatement Cost = 1 (2, 000 ∗ $20) = $20, 000 € Society’s Total Abatement Cost = € 2 Marginal Abatement Cost Answers to take-home exercise – Question 2 $70 $60 MCA – Polluter 2 $50 $40 $30 MCA – Polluter 1 pollution tax = $20 $20 $10 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 Pollution Polluter 1’s Total Abatement Cost = 1 (4, 000 ∗ $20) = $40, 000 2 Polluter 2’s Total Abatement Cost = 1 (2, 000 ∗ $20) = $20, 000 € Society’s Total Abatement Cost = € 2 $40, 000 + $20, 000 = $60, 000 Gains from specialization & trade   Why do countries export some goods and services while importing other goods & services?   Example:             The U.S. specializes in items such as computer software, commercial aircraft, and pharmaceuticals it exports these items to sell to buyers in foreign markets it gets paid for these items in export earnings it uses these export earnings to purchase such imported items as Japanese autos, Argentine soybeans, French wine, etc. essentially, the U.S. trades its computer software for Japanese autos by the same token, Japan trades its autos for U.S. computer software Gains from specialization & trade   Why don’t we simply produce all these items for ourselves?   Autarky is a situation where a country does not trade with other countries at all. It only produces for its own needs   So why not practice autarky?   Why bother with all the back and forth necessary for international trade? Gains from specialization & trade   Because we get very specific gains from specialization and trade         we are able to produce the goods and services we are most efficient at producing our trading partners are able to produce the ones they are most efficient at producing both of us end up with more of everything than we would under autarky: it’s win-win Let’s illustrate this with a simple model Gains from specialization & trade   Consider a simple model of specialization & trade between two countries:       that produce and consume only two goods:       The U.S. Vietnam computers shrimp First let’s consider the production possibilities in each country Production possibilities revisited Production possibilities revisited United States Shrimp (tons) Computers One Possibility Another Possibility Production possibilities revisited United States Shrimp (tons) Computers One Possibility 1,000 Another Possibility Production possibilities revisited United States Shrimp (tons) Computers One Possibility 1,000 0 Another Possibility Production possibilities revisited United States Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 Production possibilities revisited United States Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 Production possibilities revisited United States Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 Note that in this example, we assume constant (not increasing) opportunity cost Production possibilities revisited United States Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 Note that in this example, we assume constant (not increasing) opportunity cost This means the PPF will be a straight line with a constant slope, not a bowed-out curve Production possibilities revisited 2,500 Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 U.S. Production Possibilities Frontier Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 U.S. Production Possibilities Frontier Computers 2,000 1,500 1,000 Slope (Opportunity Cost) = - 2 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 U.S. Production of Computers and Shrimp Under Autarky Computers 2,000 1,500 1,000 Slope (Opportunity Cost) = - 2 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 U.S. Production of Computers and Shrimp Under Autarky Computers 2,000 1,500 CUS 1,000 Slope (Opportunity Cost) = - 2 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 One Possibility Another Possibility Production possibilities revisited United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 One Possibility Another Possibility 2,000 0 Production possibilities revisited United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers One Possibility Another Possibility 1,000 0 0 2,000 One Possibility Another Possibility 2,000 0 0 1,000 Production possibilities revisited 2,500 Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 Computers 2,000 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 Computers 2,000 Slope (Opportunity Cost) = - 0.5 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 Computers 2,000 Slope (Opportunity Cost) = - 0.5 1,500 Vietnamese Production of Computers and Shrimp Under Autarky 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities revisited 2,500 Computers 2,000 Slope (Opportunity Cost) = - 0.5 1,500 Vietnamese Production of Computers and Shrimp Under Autarky 1,000 CV 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production & consumption under autarky   Let’s begin by considering the situation of autarky   Each country       uses half its resources to produce its shrimp and the other half to produce its computers is entirely self-sufficient consumes exactly what it produces Production & consumption under autarky Production & consumption under autarky United States Shrimp (tons) Computers Production Consumption Production & consumption under autarky United States Shrimp (tons) Computers Production 500 1,000 Consumption Production & consumption under autarky United States Shrimp (tons) Computers Production Consumption 500 500 1,000 1,000 Production & consumption under autarky United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 500 500 1,000 1,000 Production Consumption Production & consumption under autarky United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 500 500 1,000 1,000 Production Consumption 1,000 500 Production & consumption under autarky United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 500 500 1,000 1,000 Production Consumption 1,000 1,000 500 500 Production & consumption under autarky United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Shrimp (tons) Computers Production Consumption 500 500 1,000 1,000 Production Consumption 1,000 1,000 500 500 Production Consumption Production & consumption under autarky United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Production Consumption 500 500 1,000 1,000 Production Consumption 1,000 1,000 500 500 Production Consumption Shrimp (tons) 1,500 Computers 1,500 Production & consumption under autarky United States Production Consumption 500 500 1,000 1,000 Production Consumption 1,000 1,000 500 500 Production Consumption Shrimp (tons) 1,500 1,500 Computers 1,500 1,500 Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Gains from specialization & trade   Now let’s consider what happens when these countries specialize and trade   Each country   uses all of its resources to produce only the good it is more efficient in       trades away some of what it specializes in exchange for what the other country specializes in       for Vietnam that’s shrimp for United States that’s computers Vietnam trades some of its extra shrimp for computers United States trades some of its extra computers for shrimp consumes more than it produces Gains from specialization & trade   Let’s assume an exchange rate of:   1 computer for 1 ton of shrimp Gains from specialization & trade Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption Production possibilities revisited 2,500 PUSSp & T Computers 2,000 U.S. Production of Computers after specializing 1,500 CUS 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption 0 2,000 Here’s the U.S. having shifted resources to specialize entirely in computers Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption 0 2,000 Now, let’s assume the U.S. trades away 750 computers in exchange for 750 tons of shrimp Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption 0 2,000 2,000 – 750 = 1,250 Now, let’s assume the U.S. trades away 750 computers in exchange for 750 tons of shrimp Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption 0 0 + 750 = 750 2,000 2,000 – 750 = 1,250 Now, let’s assume the U.S. trades away 750 computers in exchange for 750 tons of shrimp Gains from specialization & trade United States Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Now, let’s assume the U.S. trades away 750 computers in exchange for 750 tons of shrimp Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 0 Here’s Vietnam having shifted resources to specialize entirely to shrimp Gains from specialization & trade 2,500 Computers 2,000 1,500 1,000 Vietnamese Production of Shrimp after specializing CV 500 PVSp & T 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 0 Now, Vietnam is on the other side of that trade deal, having traded away 750 tons of shrimp in exchange for 750 computers from the U.S. Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 2,000 – 750 = 1,250 0 Now, Vietnam is on the other side of that trade deal, having traded away 750 tons of shrimp in exchange for 750 computers from the U.S. Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 2,000 – 750 = 1,250 0 0 + 750 = 750 Now, Vietnam is on the other side of that trade deal, having traded away 750 tons of shrimp in exchange for 750 computers from the U.S. Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 1,250 0 750 Now, Vietnam is on the other side of that trade deal, having traded away 750 tons of shrimp in exchange for 750 computers from the U.S. Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Shrimp (tons) Computers Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 1,250 0 750 Production Consumption Gains from specialization & trade United States Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 1,250 0 750 Production Consumption Shrimp (tons) 2,000 Computers 2,000 Gains from specialization & trade United States Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 1,250 0 750 Production Consumption Shrimp (tons) 2,000 2,000 Computers 2,000 2,000 Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) Gains from specialization & trade United States Production Consumption 0 750 2,000 1,250 Production Consumption 2,000 1,250 0 750 Production Consumption Shrimp (tons) 2,000 2,000 Computers 2,000 2,000 Shrimp (tons) Computers Vietnam Shrimp (tons) Computers World (U.S. & Vietnam) And here’s the total World level of production & consumption after the exchange Gains from specialization & trade World production and consumption with autarky World (U.S. & Vietnam) Production Consumption Shrimp (tons) 1,500 1,500 Computers 1,500 1,500 Gains from specialization & trade World production and consumption with autarky World (U.S. & Vietnam) Production Consumption Shrimp (tons) 1,500 1,500 Computers 1,500 1,500 World production and consumption with specialization & trade World (U.S. & Vietnam) Production Consumption Shrimp (tons) 2,000 2,000 Computers 2,000 2,000 Gains from specialization & trade 2,500 PUSSp & T Computers 2,000 U.S. Consumption after specializing & trading 1,500 CUSSp & T CUS 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Gains from specialization & trade 2,500 Computers 2,000 1,500 1,000 CVSp & T CV 500 Vietnamese Consumption after specializing & trading PVSp & T 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Absolute advantage vs. comparative advantage   Absolute advantage           ability to produce a given unit of a good with fewer resources this means higher overall productivity of resources each unit of resource produces more output to calculate productivities, we need to know the quantity of resources and the quantity of output Assumed resources in our U.S.Vietnam example:     U.S.: 100 workers in total Vietnam: 400 workers in total U.S. production possibilities frontier 2,500 U.S. Production Possibilities Frontier Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Absolute advantage vs. comparative advantage United States Shrimp (tons) Computers Maximum Production Productivity per Worker Absolute advantage vs. comparative advantage United States Shrimp (tons) Computers Maximum Production 1,000 Productivity per Worker Absolute advantage vs. comparative advantage United States Maximum Production Shrimp (tons) 1,000 Computers 2,000 Productivity per Worker Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Vietnam production possibilities frontier 2,500 Computers 2,000 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Vietnam Shrimp (tons) Computers Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Vietnam Shrimp (tons) Computers 2,000 Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Vietnam Shrimp (tons) 2,000 Computers 1,000 Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 Vietnam Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam So U.S. has the Absolute Advantage in Shrimp because it has the higher overall productivity per worker Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam So U.S. has the Absolute Advantage in Shrimp because it has the higher overall productivity per worker Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam But the U.S. also has an Absolute Advantage in Computers because it also has a higher overall productivity per worker in producing that good Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam But the U.S. also has an Absolute Advantage in Computers because it also has a higher overall productivity per worker in producing that good Absolute advantage vs. comparative advantage United States Maximum Production Productivity per Worker Shrimp (tons) 1,000 1,000/100 workers = 10 per worker Computers 2,000 2,000/100 workers = 20 per worker Maximum Production Productivity per Worker Shrimp (tons) 2,000 2,000/400 workers = 5 per worker Computers 1,000 1,000/400 workers = 2.5 per worker Vietnam But the U.S. also has an Absolute Advantage in Computers with the higher overall productivity per worker Absolute advantage vs. comparative advantage   So if absolute advantage (higher productivity) were the key to getting gains from specialization & trade     less productive nations (like Vietnam) could never gain from trading with… more productive nations (like the U.S.)   But we’ve seen that both these two nations did get gains from specialization & trade in our simple example   So absolute advantage is not really the key getting these gains from specialization & trade   It turns out that comparative advantage (a lower opportunity cost) is the driving factor Absolute advantage vs. comparative advantage   Comparative advantage     Comparative advantage depends on the nation’s internal production tradeoffs, not on       ability to produce a good or service with a lower opportunity cost than a trading partner the quantities of its resources or their productivities compared to those of its trading partner This means that even nations with lower overall productivity can trade with more productive nations     just so long as their opportunity costs are lower there will still be gains from specialization & trade for all the trading partners Production possibilities for only producing shrimp OR only producing Computers Production possibilities for only producing shrimp OR only producing Computers United States Shrimp (tons) Computers Only Produce Shrimp Only Produce Computers 1,000 0 0 2,000 Production possibilities for only producing shrimp OR only producing Computers 2,500 U.S. Production Possibilities Frontier Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) Computers Opportunity Cost of Computers = 1,000 0 0 2,000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers Opportunity Cost of Computers = € 0 2,000 ΔShrimp ΔComputers Production possibilities for only producing shrimp OR only producing Computers U.S. Production Possibilities Frontier 2,500 Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers Opportunity Cost of Computers = € 0 2,000 ΔShrimp −1, 000 = ΔComputers Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers Opportunity Cost of Computers = € 0 2,000 ΔShrimp −1, 000 = ΔComputers +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers Opportunity Cost of Computers = € 0 2,000 ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € 0 2,000 ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers ΔShrimp € € Production possibilities for only producing shrimp OR only producing Computers U.S. Production Possibilities Frontier 2,500 Computers 2,000 1,500 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = ΔShrimp € € Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = ΔShrimp +1, 000 € € Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € € Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Computers Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Production possibilities for only producing shrimp OR only producing Computers 2,500 Computers 2,000 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = € ΔShrimp ΔComputers Production possibilities for only producing shrimp OR only producing Computers 2,500 Computers 2,000 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = € ΔShrimp −2, 000 = ΔComputers Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = € ΔShrimp −2, 000 = ΔComputers +1, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers ΔShrimp Production possibilities for only producing shrimp OR only producing Computers 2,500 Computers 2,000 1,500 Vietnamese Production Possibilities Frontier 1,000 500 0 0 500 1,000 1,500 Shrimp (tons) 2,000 2,500 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers −1, 000 = ΔShrimp Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers −1, 000 = ΔShrimp +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers −1, 000 = = −0.5 ΔShrimp +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 U.S. has comparative advantage in computers € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers −1, 000 = = −0.5 ΔShrimp +2, 000 Production possibilities for only producing shrimp OR only producing Computers United States Only Produce Shrimp Only Produce Computers Shrimp (tons) 1,000 0 Computers 0 2,000 Opportunity Cost of Computers = ΔShrimp −1, 000 = = −0.5 ΔComputers +2, 000 Opportunity Cost of Shrimp = ΔComputers −2, 000 = = −2.0 ΔShrimp +1, 000 € Vietnam Shrimp (tons) Only Produce Shrimp Only Produce Computers 2,000 0 0 1,000 € Computers Opportunity Cost of Computers = Opportunity Cost of Shrimp = € ΔShrimp −2, 000 = = −2.0 ΔComputers +1, 000 ΔComputers −1, 000 = = −0.5 ΔShrimp +2, 000 Vietnam has comparative advantage in shrimp Other important concepts with specialization & trade   Heckscher-Ohlin Theorem       nations tend to export goods produced more intensely with resources they have a relative abundance in example: the exports wheat & corn The importance of demand       consumer tastes (demand) might explain: why nations tend to trade with partners at similar levels of development (trade within the E.U.; U.S. vs. Canada vs. Mexico) why nations trade for goods that are also produced at home (imported cars & domestic cars) Other important concepts with specialization & trade   Comparative advantage vs. “competitiveness”       nations may still trade and export goods where they have comparative advantage and become less “competitive” by importing more than they export The importance of financial transactions & exchange rates       our simple example used direct barter, but trade in the real world involves transactions in different currencies the relative value of a nation’s currency affects trade when a nation imports more than it exports, this “trade deficit” might result in foreign purchases of domestic assets like companies, real estate, farm land, financial securities, etc. Other important concepts with specialization & trade   Protectionism         actions nations take to reduce trade with the purpose of shielding domestic producers from import competition tariffs: special taxes on imports import quotas: numerical limits on amounts that can be imported Why protectionism?         freer trade usually leads to a change in the distribution of income and wealth the overall size of the pie increases but the size of any given slice of the pie may either increase or decrease gains from trade only shown that the winner’s gains are larger than loser’s losses ...
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