Econ+102+lecture+22%2C+4-3-12+-+The+pro-trade+argument copy

Econ+102+lecture+22%2C+4-3-12+-+The+pro-trade+argument copy...

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Lecture 22: Trade 1 –  The argument in favor of trade Econ 102, Winter 2012 4/3/2012 1 Required reading : Ch 5: pp. 117 – 127 Recommended reading : Salvatore, Chs 3 & 4 (on CTools)
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Outline 1. A review of macro choice 2. The Ricardian argument 3. Sources of comparative advantage 4/3/2012 2
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Macroeconomic choice, redux Today, we start to investigate that neglected tail of our national income identity, NX = (EX – IM) Why would IM or EX differ from zero? I.e., why trade? Should we trade? Is trade always good? Does everyone agree with this? If some trade is “bad”, what policies can we use to affect our trade patterns? Why would IM not equal EX? What are the costs and benefits of the resulting trade deficit/surplus? 4/3/2012 3
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Macroeconomic choice, redux Recall our model of macroeconomic production of specific goods, the PPF. To draw a PPF of a specific economy, we must know the resource stock and the productive technology of that economy. To keep things simple today, we’ll assume a linear production technology. Can describe production (with a linear technology and only one input, labor (L)) like so: - Production of 1 unit of peppers takes 3 L - Production of 1 unit of beef, takes 5 L - There are 150 units of L 4/3/2012 4 technology resources
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Macroeconomic choice, redux How does an economy make a productive choice in autarky (in isolation, with no trade)? Either via planning or markets A fully-informed, benevolent social planner makes the same welfare-maximizing choice as do competitive markets Tangency of PPF and community indifference curves 4/3/2012 5
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Macroeconomic choice, redux beef peppers 6
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Macroeconomic choice, redux There is an intra-country market for each good, so that the relative domestic price of each good (partially) determines the level of output Recall the rule of optimal production from macro choice: slope(PFF) = - price ratio slope(PPF) = Which holds in autarky as long as both goods are produced In the linear setup, the slope of the PPF is constant. Two types of autarkic outcomes: a) both goods are 4/3/2012 7 pepper beef P P P P - = - good axis y good axis x
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Macroeconomic choice, redux beef peppers In absolute value: 1. Slope(PPF) = - Pbeef/Ppepper  PPF and price line identical 3. Slope(PPF) > - Pbeef/Ppepper only peppers produced 5.
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