econ chap 3 and 9- learn from slides

The figure illustrates the market for calculators in a country Refer to Figure 9-2. As a result of trade, total surplus increases by

$250

The figure illustrates the market for calculators in a country. Refer to Figure 9-2. With free trade, consumer surplus is

$320

If PD > PW,

- Domestic country does not have comparative advantage, country imports the good

If PD < PW,

- Domestic country has comparative advantage, country exports the good

• Principle of comparative advantage:

- Each good should be produced by the individual that has the smaller opportunity cost of producing that good Specialize according to comparative advantage

A small economy is a price taker in world markets:

- Its actions have no effect on PW - When a small economy engages in free trade, PW is the only relevant price: • No seller would accept less than PW (can sell the good for PW in world markets) • No buyer would pay more than PW (can buy the good for PW in world markets)

The Determinants of Trade • The equilibrium without trade

- Only domestic buyers and sellers - Equilibrium price and quantity • Determined on the domestic market - Total benefits • Consumer surplus • Producer surplus

The figure illustrates the market for calculators in a country. Refer to Figure 9-2. With free trade, producer surplus is

$1620

Economics is about understanding choices

- To buy or not to buy - To start a business - To wear a seat belt If we understand these choices, we can better evaluate whether government or business policies will be effective - Economic models give us a systematic and logically rigorous framework to make these judgements

Gains from trade - Arise from comparative advantage (differences in opportunity costs) • When each country specializes in the good(s) in which it has a comparative advantage

- Total production in all countries is higher - The world's "economic pie" is bigger - All countries can gain from trade

Over-reliance on other countries for needed goods and services

1. National security concerns

Arguments against Free Trade National Security Concerns:

1. National security concerns 2. Effects of globalization 3. Environmental and resource concerns 4. Infant industry arguments

Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. Refer to Table 3-20. Assume that Brad and Theresa each has 60 minutes available. If each person spends all his or her time producing the good in which he or she has a comparative advantage, then total production is

10 bushels of wheat and 5 pounds of beef.

Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. Refer to Table 3-20. At which of the following prices would both Brad and Theresa gain from trade with each other?

12 bushels of wheat for 8 pounds of beef

Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day, and a worker in Felinia can produce either 5 blankets or 1 meal per day. Each nation has 10 workers. For many years, the two countries traded, each completely specializing according to their respective comparative advantages. Now war has broken out between them and all trade has stopped. Without trade, Caninia produces and consumes 10 blankets and 40 meals per day and Felinia produces and consumes 25 blankets and 5 meals per day. The war has caused the combined daily output of the two countries to decline by

15 blankets and 35 meals.

Refer to Figure 3-20. If Canada and Mexico switch from each country dividing its time equally between the production of Good X and Good Y to each country spending all of its time producing the good in which it has a comparative advantage, then total production of Good Y will increase by

3 units.

Alice and Betty's Production Possibilities in one 8-hour day Refer to Figure 3-10. If Alice produces only lemonade, she can produce

400 pitchers per day

Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that the opportunity cost of 1 table is

6 chairs for Ken and 3 chairs for Traci.

Refer to Figure 3-20. If Canada and Mexico switch from each country dividing its time equally between the production of Good X and Good Y to each country spending all of its time producing the good in which it has a comparative advantage, then total production of Good X will increase by

6 units

Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. Refer to Table 3-20. What is Brad's opportunity cost of producing one pound of beef?

6/5 bushels of wheat

Refer to Figure 3-4. If Lisa and Bryce each divides his or her time equally between producing jackets and producing sweaters, then total production is

: 3 sweaters and 13 jackets.

- Measures the cost of a good in terms of the inputs required to produce it

Absolute advantage

- The ability to produce a good at a lower opportunity cost than another producer

Comparative advantage

Countries vary by how stringent their environmental policies are. Free trade can lead to greater pollution and resource depletion in those countries with lax standards because of the increase in demand.

Environmental and resource concerns

When industries are first getting started, they may need some government protection from free trade until they get established.

Infant industry arguments

the view that governments should control trade due to the harmful effects of free trade

Protectionism

• Another measure of cost: opportunity cost:

The opportunity cost of a computer = amount of wheat that could be produced using the labor needed to produce one computer

Trade can make everybody better off because it

allows people to specialize according to comparative advantage

Tom produces baseball gloves and baseball bats. Steve also produces baseball gloves and baseball bats, but Tom is better at producing both goods. In this case, trade could

benefit both Steve and Tom.

The most obvious benefit of specialization and trade is that they allow us to

consume more goods than we otherwise would be able to consume.

Countries can gain from trade if

each exports the goods in which it has a comparative advantage

Goods produced domestically and sold abroad

exports

Economists generally support

free international trade

international trade left to its natural course without tariffs, quotas, or other restrictions.- no gov intervention.

free trade

Goods produced abroad and sold domestically

imports

A country has a comparative advantage in a good If

it produces the good at lower opportunity cost than other countries

When the nation of Duxembourg allows trade and becomes an importer of software,

residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic well-being of Duxembourg rises.

Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if

the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.

PW = PD =

the world price of a good, the price that prevails in world markets domestic price without trade

. Effects of globalization:

—shift toward interdependent economies—on domestic culture Desire to protect culture from dilution or infringement of other values