Midterm 1

# Examples a there are two countries us and japan b two

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Examples: a) There are two countries: US and Japan b) Two goods: Computers and Wheat c) One resource: Labor, measured in hours Production Possibilities in the US: - The US has 50,000 labor hours available for production, per month. - Producing one computer requires 100 hours of labor - Producing one ton of wheat requires 10 hours of labor

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-Japan has 30,000 labor hour available for production, per month. -Producing one computer requires 125 hours of labor. (Compared to the 100 hours in the US, therefore the US has an absolute advantage in producing computers, because it can produce them using less hours). - Producing one ton of wheat requires 25 hours of labor (Compared to the US, therefore again, the US has a absolute advantage in producing wheat, because they use less labor hours). *Slope: -5, each time Japan produces another computer, it requires 125 labor hours which requires a sacrifice of 5 tons of wheat. Summary: Without trade: a) US consumers get 250 computers and 2500 tons of wheat b) Japanese consumers get 120 computers and 600 tons of wheat. TRADE WOULD BENEFIT BOTH: Example One: -Suppose the US produces 3400 tons of wheat. How many computers would the US be able to produce with its remaining labor? Draw the point representing this combination of computers and wheat on the US PPF. Suppose Japan produces 240 computers. How many tons of wheat would Japan be able to produce with its remaining labor? Draw this point on Japan’s PPF.
Example Two: - Suppose the US exports 700 tons of wheat to Japan, and imports 110 computers from Japan (So Japan imports 700 tons wheat and exports, 110 computers). How much of each good is consumed in the US? Plot this combination on the US PPF. Also, how much of each good is consumer in Japan? Plot this combination on Japan’s PPF.

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BASIC INTERNATIONAL TRADE TERMS 1. Exports : Goods produced domestically and sold abroad. To export means to sell domestically produced goods abroad. 2. Imports : Goods produced abroad and sold domestically. To import means to purchase goods produced in other countries. ABSOLUTE vs. COMPARATIVE ADVANTAGE 1. Absolute Advantage : The ability to produce a good using fewer inputs than another producer. - The US has an absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the US vs. 25 in Japan - If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade. E.g. Which country has an absolute advantage in producing computers? A: Producing one computer requires 125 labor hours in Japan but only 100 in the US. Therefore, the US has an absolute advantage in both! 2. Comparative Advantage : If countries focus their production on producing goods which have a lower opportunity cost then in other countries, then world output will increase. - Gains from trade arise from comparative advantage (differences in opportunity costs).
- When each country specializes in the good in which it has a comparative advantage, total production in all countries is higher. The worlds “economic pie” is bigger, and all countries can gain from trade.

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