Economics 201, Witte, Thursday, November 17, 2005
Krugman & Wells Chapter 19 vocabulary:
appreciate, depreciate, and
Figure 19-6 (p.472)
Aplia “Exchange Rates and the Macroeconomy II”
Monday, Nov 19, 9:PM!
I have more copies of Volume VI of Krugman and Wells.
Chapter 19 is found at
Click on “Krugman/Wells Preview Site”
Click on “Sample Chapters”
Click on “Chapter 19”
CUMULATIVE Final Exam:
Thursday, December 8
Bring Wildcard, calculator,
8.5 by 11 inch note-sheet
on which you can put whatever notes you think will be helpful.
The final will resemble the recent old midterms more than it will the old final exams I’ve posted.
It’s worth 45% of your grade, but big improvements will be noted in this calculation.
David Ricardo’s Opportunity Cost example for trade.
A.Absolute Advantage – More output for a given input.
(Here, the US in both goods, but if
Mexico could produce 300 auto parts per day, then the absolute advantages would be split
between the two countries, and if Mexico could also make 200 brooms per day, then it would
have both absolute advantages).
B.Comparative Advantage – Lower opportunity cost of producing a good.
Opportunity cost for US to make a broom:
2 auto parts
Opportunity cost for Mexico to make a broom:
1.33 auto parts
Opportunity cost for US to make an auto part:
Opportunity cost for Mexico to make an auto part:
US has a comparative advantage in auto parts and Mexico has a comparative
advantage in brooms.
C.Inefficient to fail to enjoy gains from specialization and trade.
D.Given that nations follow their comparative advantages in trade:
Effect on consumer surplus from increased world supply
Effect on producer surplus from increased world demand
Losses to producers (or consumers) balanced by gains to consumers (producers)
E.Losers from trade?
Role of productivity and wages, and change in general.
Trade agreements make is cheaper for us to import goods, which benefits our
consumers (including poor ones), and makes it easier for foreigners to buy our
goods, which is good for our exporters.
Together, these effects can result in mutual
gains from exchange in both countries.
Why not make all of our own stuff and not trade with foreigners at all?
Mexico-Canada trade agreement passed ten years ago.
Bush, Clinton, and Perot.
The GWH Bush administration negotiated it.
Perot campaigned against it with the
claim that NAFTA would cause a “Giant sucking sound” of US jobs going down to