《Economics from Miss Chen》Chp6.ppt

Chapter 6 CHOICES AND TRADE: INTERNATIONAL ECONOMICS 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 1. The Production Opportunities of the Farmer and the Rancher 2.The Production Possibilities Frontier 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 2.The Gains from Trade: A Summary 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 David Ricardo 6.5 GOVERNMENT AND TRADE POLICY Open Economy an economy that interacts freely with other economies around the world Closed Economy an economy that does not interact with other economies around the world Partially Open Economy Natural Advantage * * 32 oz 8 oz 15 min/oz 60 min/oz Farmer 48 oz 24 oz 10 min/oz 20 min/oz Rancher Potatoes Meat Potatoes Meat Amount of Meat or Potatoes Produced in 8 hours Minutes Needed to Make 1 Ounce of 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 n