Chapter 6 CHOICES AND TRADE. NTErnaTIONAL ECONOMICS
Chapter 6 CHOICES AND TRADE: INTERNATIONAL ECONOMICS
6.1 THE ORIGINS OF TRADE 冷 Assumption c62 goods: meat &potatoes o6 2 people: cattle rancher potato farmer Situation s rancher can produce only meat and farmer can produce only potatoes s rancher and farmer are each capable of producing the other good, but only at great cost
6.1 THE ORIGINS OF TRADE ❖ Assumption 2 goods: meat &potatoes 2 people: cattle rancher & potato farmer ❖ Situation rancher can produce only meat and farmer can produce only potatoes. rancher and farmer are each capable of producing the other good, but only at great cost
6.2 PRODUCTION POSSIBILITIES
6.2 PRODUCTION POSSIBILITIES
1. The Production Opportunities of the farmer and the rancher Minutes Needed to make Amount of meat or 1 Ounce of Potatoes Produced in 8 hours Meat Potatoes Meat Potatoes Farmer 60 min/oz 15 min/oz8oz 320z Rancher 20 min/oz 10 min/oz 24 oz 480z
1. The Production Opportunities of the Farmer and the Rancher Minutes Needed to Make 1 Ounce of Amount of Meat or Potatoes Produced in 8 hours Meat Potatoes Meat Potatoes Farmer 60 min/oz 15 min/oz 8 oz 32 oz Rancher 20 min/oz 10 min/oz 24 oz 48 oz
2. The Production possibilities frontier a)Farmers PPF (b)Ranchers Meat Meat (ounce) If there is no trade, (ounce) If there is no trade the farmer chooses the rancher chooses this production and 24 this production and consumption 8 consumption A 12 16 32 Potatoes 24 48 Potatoes (ounce) (ounce)
2.The Production Possibilities Frontier Meat (ounce) Potatoes (ounce) 8 4 0 16 32 A Potatoes (ounce) 24 12 0 24 48 Meat (ounce) (a) Farmer’s PPF (b) Rancher’s PPF B If there is no trade, the farmer chooses this production and consumption. If there is no trade, the rancher chooses this production and consumption
6.3 SPECIALIZATION AND TRADE 令 Farmer ≈s8hfor32 oz potatoes 6 15 oz potatoes exchange of 5 oz meat os Now: 17 oz potatoes &5 oz meat os Before: 16 oz potatoes &4 oz meat 令 Rancher o6 6h for 18 oz meat 2h for 12 oz potatoes o 5 oz meat exchange of 15 oz potatoes 6 Now: 13 oz meat &27 oz potatoes os Before: 12 oz meat 24 oz potatoes
6.3 SPECIALIZATION AND TRADE ❖ Farmer: 8h for 32 oz potatoes 15 oz potatoes exchange of 5 oz meat Now: 17 oz potatoes & 5 oz meat Before: 16 oz potatoes & 4 oz meat ❖ Rancher 6h for 18 oz meat & 2h for 12 oz potatoes 5 oz meat exchange of 15 oz potatoes Now: 13 oz meat & 27 oz potatoes Before: 12 oz meat & 24 oz potatoes
1. How Trade Expands the Set of Consumption Opportunities (a) Farmers Production (b)Rancher's Production and consumption and consumption Meat Meat Ranchers Farmer's production Ranchers Farmers 24 with trade consumption consumption production with trade with trade Rancher's roduction consumption 13 and A* without trade 12 B consumption A without trade 1617 32 Potatoes 122427 48 Potatoes Farmers production with trade
1. How Trade Expands the Set of Consumption Opportunities 4 Meat Potatoes 5 16 17 A A* Farmer’s consumption with trade Farmer’s production and consumption without trade 32 Farmer’s production with trade Meat Potatoes 12 24 27 48 Rancher’s production 24 with trade 13 18 12 B B* Rancher’s consumption with trade Rancher’s production and consumption without trade (a) Farmer’s Production and Consumption (b) Rancher’s Production and Consumption 8
2. The Gains from Trade: A Summary Farmer Rancher Meat Potatoes Meat Potatoes Without trade. Production Consumption 16 12 24 With trade. Production 0 32 18 12 Trade Gets 5 Gives 15 Gives 5 Gets 15 Consumption 17 13 27 Gains from trade. Increase in Consumption +1 3
2.The Gains from Trade: A Summary Farmer Rancher Meat Potatoes Meat Potatoes Without Trade: Production & Consumption 4 16 12 24 With Trade: Production Trade Consumption 0 Gets 5 5 32 Gives 15 17 18 Gives 5 13 12 Gets 15 27 Gains from Trade: Increase in Consumption +1 +1 +1 +3
6.4 COMPARATIVE ADVANTAGE 冷 absolute advantage oo the comparison among producers of a good according to their productivity Opportunity Cost os whatever must be given up to obtain some item s Comparative Advantage os the comparison among producers of a good according to their opportunity cost oo Farmer: 1 oz meat =3 oz potatoes(OC=4 OZ oo Rancher: 1 oz potato= 1/3 oz meat(OC=1/2 oz) o Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage
6.4 COMPARATIVE ADVANTAGE ❖ absolute advantage the comparison among producers of a good according to their productivity ❖ Opportunity Cost whatever must be given up to obtain some item ❖ Comparative Advantage the comparison among producers of a good according to their opportunity cost Farmer: 1 oz meat = 3 oz potatoes (OC=4 oz) Rancher: 1 oz potato = 1/3 oz meat (OC=1/2 oz) ❖ Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage
The Opportunity Cost of Meat and Potatoes Opportunity Cost of 1 Ounce of Meat 1 Ounce of Potatoes Farmer 4 oz potatoes 14 oz meat Rancher 2 oz potatoes 12 oz meat
The Opportunity Cost of Meat and Potatoes Opportunity Cost of: 1 Ounce of Meat 1 Ounce of Potatoes Farmer 4 oz potatoes ¼ oz meat Rancher 2 oz potatoes ½ oz meat
