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Lecture

Chapter 3 Gains from Trade.docx

4 Pages
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School
Department
Economics
Course
ECN 204
Professor
Paul Missios
Semester
Winter

Description
Chapter 3: Interdependence & Gains from Trade Absolute Advantage: the comparison among producers of a good according to their productivity. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. Comparative Advantage: the comparison among producers of a good according to their opportunity cost  Opportunity Cost: whatever must be given up to obtain some item. Note: It is possible for one person to have an absolute advantage in both goods, but it is impossible for one person to have comparative advantage in both goods because the opportunity cost of one good is the inverse of the opportunity cost of the other; if a person’s opportunity cost of one good is relatively high, his opportunity cost of the other good must be relatively low. -The gains from specialization and trade are not based on absolute advantage but on comparative advantage. For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. Example Canada: 50,000 hours of labor available for production per month. 1 Computer= 100 hours of labor 1 Ton of Wheat= 10 hours of labor *Calculation: Canada has 50,000 labor hours. It takes 100 hours to produce a computer. If Canada uses all of its labor hours to produce computers, then it will produce 50,000/100 = 500 computers therefore horizontal axis is (500 computers, 0 wheat). It takes 10 hours to produce a ton of wheat. If Canada uses all of its labor to produce wheat, then it will produce 50,000/10 = 5000 tons of wheat therefore vertical axis is (0 computers, 5000 tons of wheat) Canada without trade: if it uses half of its labor to produce each of the two goods = 250 computers and 2500 tons of wheat. Japan: -300,000 hours of labor available for production per month 1 Computer = 125 hours of labor 1 Ton of Wheat= 25 hours of labor *Calculations*: Horizontal intercept (30,000/135) = 240 computers. Vertical intercept (30,000/25) = 1200 tons of wheat Japan without Trade: if it uses half of its labor then it will produce and consumer 120 computers and 600 tons of wheat. Without Trade from Both Companies: Canada: consumers get 250 computers and 2500 tons of wheat Japan: consumers get 120 computers and 600 tons of wheat Question: Suppose Canada produces 3400 tons of wheat. How many computers would Canada be able to produce with its remaining labor? Answer: Producing 3400 tons of wheat requires 34000 labor hours therefore the remaining 16,000 hours are used to produce 160 computers  Question: Suppose Japan produces 240 computers. How many tons of
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