ECON 4040 Lecture PP Chpt 3 Gains

ECON 4040 Lecture PP Chpt 3 Gains - Gains from Trade...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
Gains from Trade Chapter 3:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
David Ricardo Formulated the theory of free trade and demonstrated the gains from trade: one of the longest-standing Adam Smith q Observed that increasing specialization in production was responsible for increased output . A Simple Model of Production and Trade
Background image of page 2
Only two nations Only two goods Only one input – labor Technology is constant No learning effects of production Labor is perfectly mobile and can move back and forth between industries, but not between countries. Basic Assumptions of the Model
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chuck Rob Absolute Advantage
Background image of page 4
Lives off of fish and makes fire. He’s really perfected the art of fire- making, but he’s a terrible fisherman. Also lives off fish and makes fire. A very successful fisherman, he eats Chuck Rob Absolute Advantage
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chuck can produce more matches than Rob, with the same input (1 hour labor). Rob can produce more fish than Chuck, with the same input (1 hour labor). Chuck’s Production Rob’s Production Output per hour Matches 30 Fish 20 Output per hour Matches 10 Fish 30
Background image of page 6
Each match costs Chuck 0.67 fish. Each fish costs Chuck 1.5 matches. Each match costs Rob 3 fish. Each fish costs Chuck’s Opportunity Costs Rob’s Opportunity Costs Output per hour Matches 30 Fish 20 Output per hour Matches 10 Fish 30 Opportunity Cost Matches 20/30= 0.67 fish/match Fish 30/20 = 1.5 matches/fish Opportunity Cost Matches 30/10 = 3 fish/match Fish 10/30 = 0.34 matches/fish It’s cheaper for Chuck to make matches and Rob to fish!
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chuck Rob Before Trade Matches 15 Fish 10 Before Trade Matches 5 Fish 15 Specialization Matches 30 Fish 0 Specialization Matches 0 30 Trade (2 fish= 1 match) Matche s Sell 7 Trade (2 fish= 1 match) Matches Buy 7 Sell 14 After Trade Matche s 23 14 After trade Matches 7 16 What If Chuck and Rob Specialize and Trade?
Background image of page 8
Chuck Rob Gains from Trade: PPF
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chuck Rob Gains from Trade: Before
Background image of page 10
Chuck Rob Gains from Trade: After
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Both Chuck and Rob can now consume outside of their PPFs and they both Chuck Rob Gains from Trade
Background image of page 12
Chuck’s OC - his relative price - of a match is 0.67 fish. He will sell a match for anything more than this.
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/07/2012 for the course ECON 4040 taught by Professor Staff during the Summer '08 term at UGA.

Page1 / 41

ECON 4040 Lecture PP Chpt 3 Gains - Gains from Trade...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online