Ch. 3 - Gains from Trade We look for the answers to these...

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Gains from Trade See Mankiw’s Ch. 3 We look for the answers to these questions: Why do people and nations choose to be economically interdependent? How can trade make everyone better off? What is absolute advantage? What is comparative advantage? How are these concepts similar? How are they different? Interdependence and Gains from Trade: There are two ways to satisfy your wants. Self-sufficiency Specialize and trade One of the Seven Principles of Economics (2 nd lecture): Trade can make everyone better off. We will now learn why people and nations choose to be interdependent, and how they gain from trade. Our Example Two countries: the U.S. and Japan Two goods: computers and wheat One resource: labor, measured in hours We will look at how much of both goods each country produces and consumes if the country chooses to be self-sufficient if it trades with the other country
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Production Possibilities in the U.S. The U.S. has 50,000 hours of labor available for production, per month. Producing one computer requires 100 hours of labor. Producing one ton of wheat requires 10 hours of labor. 4,000 100 5,000 2,000 1,000 3,000 500 200 300 400 0 Computers Wheat (tons) The U.S. PPF The U.S. has enough labor to produce 500 computers, or 5000 tons of wheat, or any combination along the PPF. 4,000 100 5,000 2,000 1,000 3,000 500 200 300 400 0 Computers Wheat (tons) The U.S. Without Trade Suppose the U.S. uses half its labor to produce each of the two goods. Then it will produce and consume 250 computers and 2500 tons of wheat. Production Possibilities in Japan Japan has 30,000 hours of labor available for production, per month. Producing one computer requires 125 hours of labor. Producing one ton of wheat requires 25 hours of labor. Use the following information to draw Japan’s PPF. Your graph should measure computers on the horizontal axis.
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Computers Wheat (tons) 2,000 1,000 200 0 100 300 Japan’s PPF Japan has enough labor to produce 240 computers, or 1200 tons of wheat, or any combination along the PPF. Japan Without Trade Computers Wheat (tons) 2,000 1,000 200 0 100 300 Suppose Japan uses half its labor to produce each of the two goods. Then it will produce and consume
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Ch. 3 - Gains from Trade We look for the answers to these...

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