ECN104 LECTURE NOTES September 14, 2012
Interdependence – Everyday you rely on many people from around the world,
most of whom you’ve never met, to provide you with the goods and services you
One of the Ten Principles from Chapter 1:
Trade can make everyone better off
We now learn why people – and nations – choose to be interdependent,
and how they can gain from trade.
Two countries: Canada and Japan
Two goods: Computers and wheat
One resource: labour, measured in hours
We will look at how much of both goods each country produces and
If the country chooses to be self – sufficient
If it trades with the other country
Production Possibilities in Canada
Canada has 50,000 hours of labour available for production, per month
Producing one computer requires 100 hours of labour
Producing one ton of wheat requires 10 hours of labour
Basic International Trade Terms
Goods produced domestically and sold abroad to export means to sell
domestically produced goods abroad.
Goods produced abroad and sold domestically to import means to
purchase goods produced in other countries.
Where do these gains come from?
The ability to produce a good using fewer inputs than another producer
Canada has an absolute advantage in wheat: producing a ton of wheat
uses 10 labour hours in Canada vs. the 25 hours of required labour in
If each country has an absolute advantage in one good and specializes in
that good, then both countries can gain from trade.
Which country has an absolute advantage in computers?
Producing one computer requires
125 Labour hours in Japan
100 Labour hours in Canada
Canada has an absolute advantage in both goods Question: So why does Japan specialize in computers? Why do both
countries gain from trade?
Two Measures of the Cost of a Good
Two countries can gain from trade when each specializes in the good it
produces at lowest cost
Absolute advantage measures the cost of a good in terms of the inputs
required to produce it
Recall: Another measure of cost is opportunity cost
In our example, the opportunity cost of a computer is the amount of