More on trade issues Today: Review of Test 1 Finishing comparative advantage Introducing...
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Transcript of More on trade issues Today: Review of Test 1 Finishing comparative advantage Introducing...
More on trade issues
Today: Review of Test 1 Finishing comparative
advantageIntroducing international
trade
Who is this? Come to class to
find out We will find out
why he has made significant contributions to trade theory
Comparative advantage
We have done the basics of comparative advantage
Today We apply these principles, including
to international trade
Today
Comparative advantage and specialization
An introduction to trade Addressing concerns about trade
Example
Productivity in pizza
production
Productivity in salad production
Greg 20 pizzas cooked per
hour
10 salads made per hour
David 16 pizzas cooked per
hour
4 salads made per hour
Drop units to save space Notice that
Greg has absolute advantage in producing both pizzas and salads
However, we will see that each person has a comparative advantage in producing one of the goods
Productivity in pizza productio
n
Productivity in salad
production
Greg 20 / hour 10 / hour
David
16 / hour 4 / hour
Comparative advantage
Before we can determine comparative advantage, we must ask about each person “how much of ____ must I give up in order to produce an additional ____?” In other words, we need to determine
the opportunity cost of making one more pizza or one more salad for both Greg and David
Recall this table
Productivity in pizza
production
Productivity in salad production
Greg 20 pizzas cooked per
hour
10 salads made per hour
David 16 pizzas cooked per
hour
4 salads made per hour
Opportunity cost table
Note that the two numbers in each row are mathematical inverses of each other
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Comparative advantage
To find comparative advantage for each person, find the lowest number in each column
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Comparative advantage
David has comparative advantage in cooking pizzas
Greg has comparative advantage in making salads
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Some things to note
Absolute advantage The same person could have absolute
advantage in everything Comparative advantage in a two-
person, two-good economy Each person will almost always have
comparative advantage in exactly one of the two goods
From Greg and David to a big economy
To produce an efficient point in an economy, each good needs to be produced with lowest opportunity cost
All units in this graph in millions
From Greg and David to a big economy Notice that opportunity cost of pizzas
increases from A to C Opportunity cost increases as more is
produced
All units in this graph in millions
Changes in a production possibilities curve
Some factors that can shift a production possibilities curve Change in population War Investment in buildings, machines,
and other forms of capital Research and development in
technology
From comparative advantage to trade
Recall that Greg had comparative advantage at making salads, while David’s was making pizzas
Greg could make more salads than he wants to eat and trade them for pizzas from David Both can be made better off with
trade
International trade In the real world, trade is more complex
than simple two-good economies When trade becomes more open between
countries, there are typically millions of winners and often only thousands of losers Prices go down for goods on average The few displaced workers must find an
alternate form of work, typically at a lower wage
Addressing concerns about trade “A majority of Americans, including
60 percent of Republicans, now believe free trade is bad for the U.S. economy, according to recent NBC News-Wall Street Journal polls.”(Source: “Trade jitters, anti-China sentiment rouse US voters,” Reuters, Nov. 14, 2007)
Why do so many Americans have this opinion about trade?
Trade has costs and benefits
When another country can produce goods lower than in the United States, two things happen Jobs are lost in the United States Consumers pay lower prices for the good
that is now imported The news media usually focuses on
the jobs issue more than about prices
Why is media coverage skewed?
Any job lost seriously deteriorates the quality of life of an individual
Most people don’t care to read headlines advertising “The price of rice goes down by two cents per pound” However, small gains on many products
lead to substantial increases in the purchasing power of the dollar
Suppose there is protectionism elsewhere The United States is a leading exporter
of fresh fruit (see on-line reading list for source)
Suppose that other countries outlawed the import of fresh fruit US jobs lost Decrease in price of fruit in the US Increase in the price of fruit in other
countries
Protectionist policies
Suppose that protectionist policies were implemented Also suppose that these policies lead
to the price of goods on average increasing by 10 to 20 percent
Would you be in favor of this?
Another issue: Lead in toys Recently, many toys manufactured
in China have been recalled due to unsafe levels of lead
This has raised concerns about the viability of toy exports
China will stop exporting toys if the world does not view the toys as safe enough, given the price
Monitoring is costly
Monitoring toys for lead is costly, adding to the cost of toys purchased
However, testing costs may be small relative to the additional revenues that can be generated if the delivery of “safe toys” can be guaranteed
Another example: American cars Over the last 30 years, American cars
have often been looked at as “inferior” compared to some foreign models
With competition from trade, domestic car producers must keep costs down and quality up in order to successfully sell cars in the domestic market
The same thing goes for foreign toys If quality control standards are not
maintained abroad, people will buy their toys domestically
Trade issues There are many other issues that
are related to trade If you would like an in-depth
analysis of trade, you can enroll in a class that deals with trade
Wednesday, we will talk about the basic issues of trade, and who the winners and losers are
International trade We will examine more about international
trade in the next lecture Next lecture: More on the mathematical
analysis of international trade Look at lecture slides (no new reading)
Think about how trade benefits your everyday life Example: You could speculate about the price
of gas if OPEC countries stopped producing oil