Vocabulary-definition: Absolute Advantage (p.16)
It is the ability to produce the same good using fewer inputs than another producer. -A producer has an absolute advantage over another producer if it can produce more output from the same input. (p.19)
Vocabulary-definition: Production Possibilities Frontier (p.16)
It shows all the combinations of goods that a country can produce given its productivity and supply of inputs.
Vocabulary-definition: Comparative Advantage (p.17)
A country has a comparative advantage in producing goods for which it has the lowest opportunity cost.
What are the 3 Benefits of trade? (p.13)
1. Trade makes people better off when preferences differ.2. Trade increases productivity through specialization and the division of knowledge.3. Trade increases productivity through comparative advantage. (A third reason to trade is to take advantage of differences). Comparative advantage: It's a good thing.
How does trade create value?
Trade creates value by moving goods from people who value them LESS to people who value them MORE. (p.14)
What would happen WITHOUT specialization and trade?
WITHOUT specialization and trade, we would EACh have to produce our own food as well as other goods, and the result would be mass starvation and the collapse of civilization. (p.14)
The relationship between knowledge, trade, and specialization. (p.15)
*Knowledge increases productivity so specialization increases total output. *All of this knowledge is possible, however, only because each person can specialize in the production of one good and then trade for all other desired goods. *WITHOUT trade, specialization is IMPOSSIBLE. *The division of knowledge increases with specialization and trade. Economic growth in the modern era is primarily due to the creation of new knowledge. Every increase in world trade is an opportunity to increase the division of knowledge and extend the power of the human mind.
Notes on Opportunity Costs & Comparative Advantage.
*The theory of comparative advantage explains trade patterns and tells us that a country (or a person) will ALWAYS be the low-cost seller of some good. The reason is clear: The greater the advantage a country has in producing A, the greater the cost to it producing B. *Everyone can benefit from trade. *Trade unites humanity.
Foot-Notes on page 20.
*In a free market, the same good will tend to sell for the same price everywhere. -Imagine that the wages in a computer manufacturing exceed the wages in shirt manufacturing. Everyone wants a higher wage, so workers in the shirt industry will try to move to the computer industry. As the supply of workers in computer manufacturing increases, however, wages in the computer sector will fall. And, as the supply of workers in shirt manufacturing decreases, wages in that sector will increase. Only when workers of the same type are paid the same wage is there NO incentive for workers to move.*We calculate the value of consumption because at the end of the day workers care about what they consume, NOT what they produce. *Trade can increase productivity by improving the division of knowledge and by diffusing information about advanced production techniques. These advantages of trade are important but the logic of comparative advantage does NOT require an increase in productivity.
Does everyone always benefit from increased trade? (pg.21)
NO. Overall, however, greater trade increases total wealth. That typically brings benefits to a great many people in all parts of the trading world.
TAKEAWAY. (pg. 21)
*Simple trade makes people better off when preferences differ, but the true power of trade occurs when trade leads to specialization. *Specialization creates enormous increases in productivity. *Without trade, the knowledge used by an entire economy is approximately equal to the knowledge used by one brain. *With specialization and trade, the total sum of knowledge used in an economy increases tremendously and far exceeds that of any one brain. *International trade is trade across political borders. The theory of comparative advantage explains how a country, just like a person, can increase its standard of living by specializing in what it can make at low (opportunity) cost and trading for what it can make only at high cost. When we apply the logic of opportunity cost to trade, we discover that everyone has a comparative advantage in something, so everyone can benefit from inclusion in the world market.
CHECK YOURSELF: What does specialization do to productivity? Why? (p.21)
Specialization increases productivity because it increases knowledge.
CHECK YOURSELF: How does trade let us benefit from the advantages of specialization? (p.21)
If people can't trade for other goods, they won't specialize in producing just one good. Thus, trade is necessary if people are to benefit from specialization.
CHECK YOURSELF: Usain Bolt is the world's fastest human. Usain could probably mow his lawn very quickly, much more quickly and at least as well as Harry, who mows lawns for a living. Why would Usain Bolt pay Harry to mow his lawn rather than do it himself? (p.21)
Usain Bolt has a comparative advantage in running, but Harry has a comparative advantage in mowing Usain's lawn because Harry faces a much lower opportunity cost in mowing lawns than Usain Bolt does.
Why do we trade?
*It makes sense to divide knowledge across many brains and then trade.*Division of tasks= "specialization"..... and when each person knows something different, the combined brain power of a society is HUGE.
How is international trade similar to domestic trade? (NOTE: 3 correct answers).
a. International trade makes people better off when preferences differ.b. International trade increases productivity through specialization and the division of knowledge.c. Trade increases productivity through comparative advantage.
Many people will tell you that, whenever possible, you should always buy U.S.-made goods. If this argument were taken to its natural conclusion, where should you buy all of your goods from?
Yourself.
True or False: Every country has at least one comparative advantage in something.
TRUE.
The cost of the next most valuable opportunity is known as a
opportunity cost.
What is a source of comparative advantage? (NOTE: 2 correct answers)
a. climateb. institutions
In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. (NOTE: 2 correct answers)
b. Mitchell has the absolute and comparative advantage at making miso soup.c. Kana has the absolute and comparative advantage at cleaning the kitchen.
In one hour, Ethan can bake 20 cookies or lay the drywall for two rooms. In one hour, Sienna can bake 100 cookies or lay the drywall for three rooms. (NOTE: 1 correct answer)
Sienna has the absolute and comparative advantage at baking cookies.
Data can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day. (NOTE: 1 correct answer)
Data has the absolute and comparative advantage at solving physics problems.
WORK (HOW TO SOLVE) IS IN MY ECO-252 NOTEBOOK!!Use the information below to answer questions 1-7. According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here. (In the North it takes 30 hours to make one high-quality care and 20 hours to make one low-quality car. In the South it takes 60 hours to make one high-quality care and 30 hours to make one low-quality car.) Question 1: Which region has an absolute advantage at producing high-quality cars? Question 2: Which country has an absolute advantage at producing low-quality cars? Question 3: What is the opportunity cost of producing one high-quality car in the South?Question 4: What is the opportunity cost of producing one high-quality car in the North?Question 5: Which country has a comparative advantage for producing low-quality cars? Question 6: Which country has a comparative advantage for producing high-quality cars?Question 7: There are 1 million hours of labor available for making cars in the North, and another 1 million hours of labor available for making cars in the South. In a no-trade world, let's assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. What will be the global output of low-quality cars?Question 8: Now, allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will be the global output of low-quality cars?
Question 1: North. Question 2: North.Question 3: 2 low-quality cars. WORK: One high-quality car=60 hours. With the 60 hours, how many low-quality cars could it produce? 60 hours / 30 hours = 2 low-quality cars. SouthQuestion 4: 1.5 low-quality cars. WORK: One high-quality car=30 hours. With the 30 hours, how many low-quality cars could it produce? 30 hours / 20 hours = 1.5 low-quality cars.Question 5: South.Question 6: North.Question 7: 27,778 Question 7: 33,333
Trade makes us rich. How?
Trade allows us to:• Specialize• In goods/services we are good at producing, which makes us more• Productive (and the overall knowledge level rises as everyone develops a unique set of knowledge).Trade also makes it possible to access larger markets, so we:• Can utilize large-scale production (economies of scale) that is often more productive and• Have more financial incentives to be productive (i.e., the rewards are much larger). More productive == Richer
How do we systematically figure out which country should specialize in what product?
• Compute the opportunity cost of producing one product.• The country with the lower opportunity cost should specialize in the product.
Question 1: Is it possible, in theory, to create an economy in which everybody who wants to work has a job and nobody is exploited?Question 2: If it was, what kind of society would it be?
Question 1: Yes.Question 2: Autarky (making everything by yourself).
Suppose we are stuck in a classroom and no extra goods will be brought in. Also suppose we don't produce any goods or services. Is it possible sometimes to make ourselves better off without hurting anybody else?
Yes, it sometimes is possible. If there are two people each of whom has what the other wants more, they can trade them and both will be better off. It will not make anybody else worse off.
Question 1: Thomas Thwaites sought out the help and advice of several people and consulted many textbooks as he attempted to build his toaster from scratch. Why didn't he just locate one person who knows absolutely everything there is to know about what it takes to build a toaster?Question 2: If every person had to make his or her own toaster, just as Thomas Thwaites did, then in a society of a million people, we would expect:Question 3: In the video, productivity in an economy is increased by each of the following EXCEPT:
Question 1: Because building a toaster from scratch requires many detailed processes and it is not possible for a single person to have knowledge of each and every process in detail.Question 2: the best toaster to be not much better than Thomas Thwaites's toaster.Question 3: differing preferences.