Lecture 4-The Gains from Trade

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1 Aug 2010
School
Department
Course
Professor
Friday, September 25th, 2009.
The Gains from Trade
2 Individuals
Gains from trade not controversial
(Note that neither Jane nor John experiences a temporary period of unemployment)
2 Countries (Canada and United States)
Jobs will be lost (no comparative advantage)
And jobs will be gained (comparative advantage)
Why is Free Trade so Controversial?
1. Benefits are widely distributed
Costs (example, plant shutdown) tend to be concentrated
2. Focus of public debate is on job gains and looses, not on
- lower prices to consumers
- higher productivity and standard of living in the long run
Example: Sharp Increase in bicycles imported from China (2005-2006)
1. Reaction
Consumers (many) benefit from lower prices
Producers (few) lobby government to restrict imports
2. Economics
- China has comparative advantage in production of bicycles; Canada does
not
- Bicycle production in Canada will fall (jobs lost ± workers will, after
transition, find other jobs)
Bill Gates (Microsoft): Should he write computer program?
1. Time to write computer program
Gates: 3 hours
Consultant: 10 hours
2. Next best alternative
Gates earns $10,000 per hour as executive
Consultant earns $100 per hour
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3. Opportunity cost of writing program
Gates: $30,000 (3 hours times $10,000)
Consultant: $1,000 (10 hours times $100)
4. Results
(1) Gates has absolute advantage
(2) Consultant has comparative advantage
(3) Consultant should write program
Competitive Market
Many buyers and sellers, each of whom has no influence on market price
Example: coffee
Laws of Downward Sloping Demand:
Other things equal, the higher is the price of a good, the lower is the quantity
demanded
Candy Bars
Price Quantity Demanded
5 0
4 3
3 6
2 9
3
6
5
4
3
Q
P
Candy Bars
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