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ECON 1010 Quiz: Micro4th ppt notes ch3
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Department
Economics
Course
ECON 1010
Professor
Steven Edwards
Semester
Fall

Description
▪ Interdependence ▪ One of the Ten Principles of Economics from Chapter 1: Trade can make everyone better off. ▪ Our Example ▪ Two countries: the U.S. 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 consumes • if the country chooses to be self-sufficient • if it trades with the other country ▪ Production Possibilities in the U.S. ▪ The U.S. 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. ▪ The U.S. PPF ▪ The U.S. Without Trade ▪ Derive Japan’s PPF ▪ Japan has 30,000 hours of labour available for production, per month. ▪ Producing one computer requires 125 hours of labour. ▪ Producing one ton of wheat requires 25 hours of labour. ▪ Japan’s PPF ▪ Japan Without Trade ▪ Consumption With and Without Trade ▪ Without trade, • U.S. consumers get 250 computers and 2500 tons wheat. • Japanese consumers get 120 computers and 600 tons wheat. ▪ We will compare consumption without trade to consumption with trade. ▪ First, we need to see how much of each good is produced and traded by the two countries. ▪ Production under trade 1. Suppose the U.S. produces 3400 tons of wheat. How many computers would the U.S. be able to produce with its remaining labour? Draw the point representing this combination of computers and wheat on the U.S. PPF. 2. Suppose Japan produces 240 computers. How many tons of wheat would Japan be able to produce with its remaining labour? Draw this point on Japan’s PPF. ▪ U.S. Production With Trade ▪ Japan’s Production With Trade ▪ International Trade ▪ Exports: goods produced domestically and sold abroad ▪ Imports: goods produced abroad and sold domestically ▪ Consumption under trade ▪ How much of each good is consumed in the U.S.? Plot this combination on the U.S. PPF. ▪ How much of each good is consumed in Japan? Plot this combination on Japan’s PPF. ▪ U.S. Consumption With Trade ▪ Japan’s Consumption With Trade ▪ Trade Makes Both Countries Better Off ▪ Where Do These Gains Come From? ▪ Absolute advantage: the ability to produce a good using fewer inputs than another producer ▪ The U.S. has an absolute advantage in the production of wheat: producing a ton of wheat uses 10 labour hours in the U.S. vs. 25 in Japan. ▪ If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade. ▪ Where Do These Gains Come From? ▪ Which country has an absolute advantage in computers? ▪ Producing one computer requires 125 labour hours in Japan, but only 100 in the U.S. ▪ The U.S. has an absolute advantage in both goods! ▪ 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
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