1 comparative advantage, exchange rates, and globalization 9 9-1 application: comparative advantage...
TRANSCRIPT
1Comparative Advantage, Exchange Rates, and Globalization
9
9-1
Application: Comparative Advantage
United States Saudi Arabia% of
resources devoted to oil
Oil produced (barrels)
Food produced
(tons)
% of resources
devoted to oil
Oil produced (barrels)
Food produced
(tons)
100 100 0 100 1,000 0
80 80 200 80 800 20
60 60 400 60 600 40
40 40 600 40 400 60
20 20 800 20 200 80
0 0 1,000 0 0 100
Who has comparative advantage in production of oil? Food?
1Comparative Advantage, Exchange Rates, and Globalization
9
9-2
Application: Comparative Advantage
Oil
Food
The U.S. has comparative advantage in food
because it has a lower opportunity cost (in terms
of oil) to produce food
20
60
400200
40
80
100
600 1,000800
Oil
Food
200
600
4020
400
800
1,000
60 10080
PPF : United States PPF : Saudi Arabia
Saudi Arabia has comparative advantage in oil
because it has a lower opportunity cost (in terms of
food) to produce oil
The U.S. should produce 1,000
tons of food
Saudi Arabia should produce
1,000 barrels of oil
1Comparative Advantage, Exchange Rates, and Globalization
9
9-3
Application: The Gains from Trade
Production Consumption
U.S. Saudi Arabia U.S. Saudi Arabia I.T.
Oil (barrels) 0 1,000 120 500 380
Food (tons) 1,000 0 500 120 380
A trader, I.T., arranges for Saudi Arabia to trade 500 barrels of oil to the U.S. for 120 tons of food
The U.S. will trade 500 tons of food to Saudi Arabia for 120 barrels of oil
I.T. keeps 380 barrels of oil and 380 tons of food
1Comparative Advantage, Exchange Rates, and Globalization
9
9-4
Application: The Gains from Trade
Oil
Food
After trade, the U.S. can consume beyond its PPF
20
60
400200
40
80
100
600 1,000800
Oil
Food
200
600
4020
400
800
1,000
60 10080
PPF : United States PPF : Saudi Arabia
After trade, Saudi Arabia can consume beyond its PPF
120
120
1Comparative Advantage, Exchange Rates, and Globalization
9
9-5
0
Pri
ce o
f eur
os
(in
do
llars
)
The Supply of and Demand for Euros
Determination of Exchange Rates and Trade
Quantity of euros
QD
$1.30
S0
D0
In this figure, the supply of euros is equivalent to the demand for dollars, and equilibrium occurs at a dollar price of $1.30 for one euro.
S1
1.10
D1
If the supply of euros rises, and the demand for euros falls, the price decreases to $1.10, the new equilibrium.
1Comparative Advantage, Exchange Rates, and Globalization
9
9-6
Determination of Exchange Rates and Trade
0 Q0
Pri
ce
Q1 Q2
P1
P0
Imports
SW1
SW0
Domestic supply
Domestic demand
If the world price level is P1, domestic producers will sell Q1 and domestic consumers will demand Q2. The difference is made up by imports shown by the difference between Q2 and Q1. A country will have a zero trade balance when the world price level equals the domestic price level, P0.