ECN104 - Chapter 3 and 4

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ECN104 – Week 2 Notes
Chapter 3
Questions
oWhy do people – and nations – choose to be economically
interdependent?
oHow can trade make everyone better off?
oWhat is absolute, comparative advantage? How are these similar and
different?
Interdependence
oOne of the Ten Principles from Chapter 1: “Trade can make everyone
better off.”
oWe now learn why people and nations
oExample
Two countries: Canada and Japan
Two goods: Computers and wheat
One resource: labor, 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 Canada
Canada has 50,000 hours of labor available for
production, per month
Producing one computer = 100 hours of labor
oCanada can produce 500 computers
Producing one ton of wheat = 10 hours of labor
(50000/100)
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oCanada can produce 5000 tons of wheat
(50000/10)
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Consumption with and without trade
oWithout trade
Canadian consumers get 250 computers and 2500 tons of wheat
Japanese consumers get 120 computers and 600 tons of 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
Basic International Trade Terms
oExports: goods produced domestically and sold abroad
To export means to sell domestically produced goods abroad
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