Comparative advantageslide 1 The Gains from Trade Why do people specialize in the production of a few goods or services and then trade? Why don't people.

Download Comparative advantageslide 1 The Gains from Trade Why do people specialize in the production of a few goods or services and then trade? Why don't people.

Post on 05-Jan-2016

213 views

Category:

Documents

0 download

TRANSCRIPT

<ul><li><p>The Gains from TradeWhy do people specialize in the production of a few goods or services and then trade?</p><p>Why don't people become self-sufficient instead, producing everything they need?</p></li><li><p>An ExampleSuppose there are two people, McPherson and Brown.</p><p>Both can produce Tacos and Spaghetti, but they are not equally adept.</p></li><li><p>McPherson's Daily Production Possibilitiestacosspaghetti105</p></li><li><p>McPherson has preferences that make him want to consume 4 tacos and 2 spaghetti.</p><p>[Show his consumption point on the graph.]</p></li><li><p>Brown's Daily Production Possibilitiestacosspaghetti1051212BrownMcPherson</p></li><li><p>Suppose that Brown consumes 5 spaghetti and 7 tacos.</p><p>[Show his consumption point on the graph.]</p></li><li><p>Without specialization and trade here's where they are in production and consumption:</p><p>STBrown57McPherson24Total711</p></li><li><p>Absolute advantage: A person has an absolute advantage in the production of a good if he/she uses less inputs to produce a unit of the good.</p><p>Notice that Brown has an "absolute advantage" in the production of both goods.</p></li><li><p>Comparative advantage: A person has a comparative advantage in the production of a good if that person can produce an extra unit of the good at lower opportunity cost.</p></li><li><p>Be sure you can answer these questions:</p><p>1) What's McPherson's cost of one more plate of spaghetti?2) What's Brown's cost of one more plate of spaghetti?3) Who has the "comparative advantage" in spaghetti production?Go to hidden slide</p></li><li><p>1) 1/22) 13) McPherson. [1/2 is less than 1.]</p></li><li><p>Now let McPherson specialize completely in the production of spaghetti, and Brown specialize completely in the production of tacos.</p></li><li><p>The table shows total production with specialization. More is produced of both goods.STBrown012McPherson100Total1012</p></li><li><p>If Brown and McPherson can arrange to specialize and then trade, both can be better off.In this case the gains from specialization are 3 plates of spaghetti and 1 taco.</p></li><li><p>The Krugman ExampleThe Krugman example of comparative advantage starts with input requirements instead of output limits.</p><p>But the two are really equivalent.</p></li><li><p>The table shows labor requirements per vehicle. Whats the MC of a bus?200300600100AUTOBUSEASTWEST</p></li><li><p>The table shows labor requirements per vehicle. Whats the MC of a bus?2000.52300600100AUTOBUSEASTWESTMC of BUS</p></li><li><p>Suppose each area had 3,000 hours total labor.Then EAST could produce 30 AUTOS, or 15 BUSES. Or any combination in between.</p><p>And WEST could produce 5 AUTOS, or 10 BUSES. Or any combination in between.</p></li><li><p>30155WEST10EASTBUSESAUTOSMC of a BUS in the East is 2.MC of a BUS in the West is 0.5.</p></li></ul>

Recommended

View more >