Transcript Absolute advantage

经济学II：世界经济
Economics 2: The World Economy
Webpage

For information concerning this course,
including PowerPoint slides and a course
syllabus, please visit my website at:
http://www.angelfire.com/
ok5/osucowboytc
What is the purpose of this course?
To introduce you to the World Economy
 To focus on the key features of the
global economic environment
 To advance economic concepts and allow
you to develop research and analytical
skills
 To gain an understanding of trade,
international payments, exchange rates
and economies undergoing change

Outcomes of this course

Outcome 1 – Explain international trade
and the role of trade organizations

Outcome 2 – Analyze the balance of
payments and exchange rate regimes

Outcome 3 – Evaluate world economies
Assessment
There will be one open assessment to
develop your research skills
 You will be required to present a
portfolio of evidence either in the form
of a written report or in oral presentation
 A written report will require a response
of 1000-2000 words, where an oral
presentation should be 15 minutes in
length

A Global Economy

You buy a computer in the United States
The components of the computer were
designed in Japan
 The components were manufactured in
China
 When you call for service, your call is
transferred to a customer service agent in
India

Common Mistakes in
International Trade
"Trade is zero-sum" - trade can bring
benefits to both partners
 "Imports bad, exports good" - if you buy
nothing from other countries, they have
no income to buy from you
 "Tariffs and quotas save jobs" - cutting
imports makes it harder to export, so
other jobs are lost

Reasons for Trade




Main objective of any nation is to generate
high and rising standard of living
No nation can efficiently make everything
itself
International trade allows countries to focus
on producing what they make efficiently
Sectors open to competition become more
efficient and productive
Reasons for Trade

Overall standard of living is higher
Access to raw materials & energy not
available at home
 Access to goods & components made less
expensively elsewhere
 Access to financing and investment not
available at home

Results of Trade

Overall standard of living is higher
Access to raw materials & energy not
available at home
 Access to goods & components made less
expensively elsewhere
 Access to financing and investment not
available at home

Results of Trade (cont.)

Other impacts - good & bad
Slows inflationary pressures at home
 Limits domestic wage increases
 Makes economy vulnerable to external
disturbances
 Limits impact of domestic fiscal policy on
economy

A Look at Economies of the World
Rank
1
Economy
United States
$ US Millions
10,416,818
2
3
4
Japan
Germany
United Kingdom
3,978,782
1,976,240
1,552,437
5
6
7
France
China
Italy
1,409,604
1,237,145
1,180,921
8
9
10
Canada
Spain
Mexico
715,692
649,792
637,205
Gross National Product
国民生产总值
 This means that the income of all citizens of
the country is included and the income of all
non-citizens is excluded
 Used by the United Nations to measure the
wealth and poverty of nations
 Per capita = Total GNP\Total Population

GNP
Pop
GNP per capita

EX.
= $ 1,000,000,000
=
÷ 1,000,000
=$
1,000
Gross Domestic Product
Many economists consider GNP a poor
measure of wealth
 They prefer a measure called GDP (国内生
产总值)
 GDP includes all income within a country
and excludes all income outside a country,
regardless of who earns the income
 GDP per capita is calculated the same as
GNP per capita

GDP’s of the World
Rank
1
Country
Liechtenstein
GDP Per Capita US $
42,416
2
3
4
Switzerland
Japan
Luxembourg
42,416
41,718
35,109
5
6
7
Norway
Denmark
Germany
33,734
33,191
29,632
8
9
10
Austria
Belgium
Monaco
29,006
26,582
26,470
Exports of goods and services as percent of
Gross Domestic Product, 1999
Country
Netherlands
Norway
Canada
Mexico
South Korea
United Kingdom
Germany
France
United States
Japan
Exports as percent of GDP
55%
41
39
31
31
29
25
25
12
10
Outcome 1
Section 1
A “Global” World
Free Trade

What is Free Trade?

Trading of goods between countries without
any barriers to the transaction

Allows countries to obtain goods that they
do not produce or do not produce efficiently
Free Trade
Canada
Wheat
UK
Machinery
Coal
West
Indies
Oil
Nigeria
Free Trade
UK
Canada
Corn
Wheat
Machinery
Coal
West
Indies
Oil
Nigeria
Free Trade

Assumptions

No barriers of any kind would be imposed
upon entry of the goods to any market
 What


are some types of barriers?
The selling price would be the “economists
price” (the goods would be sold at a price
which covers all the costs relating to
producing and transporting the goods plus
allow for what economists term “normal
profit”
Free Trade is an idealized situation that
rarely, if ever, really occurs
Absolute Advantage（绝对优势）
Adam Smith
Adam Smith
Scottish Philosopher and Economist
 Wrote “An Inquiry into the Wealth of
Nations”, better known as “The Wealth
of Nations”
 Established basic economic principals
such as free markets

Absolute Advantage
Occurs when one country can produce a
good or service more cheaply than
another country
 A country can possibly have an absolute
advantage in producing many goods, or
an absolute advantage in producing no
goods
 Countries benefit from exporting what
they produce cheaper than anyone else

Absolute Advantage
Absolute advantage: each nation is more
efficient in producing one good
Output per labor hour
Nation
United States
United Kingdom
US should produce….?
UK should produce….?
Wine
Cloth
5 bottles 20 yards
15 bottles 10 yards
Absolute Advantage
Absolute advantage: one nation is more
efficient in producing both goods
Output per labor hour
Nation
United States
United Kingdom
US should produce….?
UK should produce….?
Cars
40 cars
25 cars
Wheat
20 bushels
10 bushels
Absolute Advantage

Limitations
Countries often want to import goods and
services but cannot guarantee that the
country whose product they purchase will
want to purchase their own products
 Cannot explain, for example, why the US is
the United States is both the largest
producer and importer of cars in the world

Comparative Advantage（相对优势）
David Ricardo
David Ricardo

British Economist

Main developer of Classical Economics

Famous for his “Wine and Cheese”
explanation of Comparative Advantage
Comparative Advantage

Nations can gain from specialization, even if
they lack an absolute advantage

Absolute Advantage
(aL = labor/1 unit, no * = USA, * = France)
If aLA < aL*A, then USA has an absolute
advantage in producing Product A over
France
Comparative Advantage
Opportunity Cost（机会成本）


To produce one product, a country
must use resources that could be
used to produce another product
L*A
A
Y-Axis

X
B
Marginal Rate of Transformation

Slope, shows how much of one
product must be given up to
produce another product
L*B
Marginal Rate of
Transformation
Comparative Advantage
The USA has a comparative advantage in
producing Product A over France if:
aLA aL*A
aL*B
aLB
aLB
<
aL*B
aL*A
<
aLA
In this case, France would have the
comparative advantage in producing
Product B
Comparative Advantage
This can also be calculated from production:
The US has a comparative advantage in Product
A if:
A
A*
B*
B
>
>
B
B*
A*
A
In this case, France would have the comparative
advantage in producing Product B
Comparative Advantage
Cheese
Wine
Total
USA
aLC=1
aLW=2
L=24
France
aL*C=6
aL*W=3
L*=24
Which country has the absolute advantage in Cheese? Wine?
Cheese – aLC(1) < aL*C(6) = US
Wine – aLW(2) < aL*W(3) = US
Which country has the comparative advantage in Cheese? Wine?
Cheese – aLC(1)
aL*C(6)
US requires 0.5 hrs/unit of Cheese
<
=
aLW(2)
aL*W(3)
France requires 2 hrs/unit of Cheese
Wine -
aL*W(3)
aLW(2)
<
aL*C(6)
aLC(1)
France requires 0.5 hrs/unit of Wine
=
US requires 2 hrs/unit of Wine
US has a comparative advantage in Cheese, France has a comparative advantage in wine
Wine
Comparative Advantage
24
The slope (MRT) of the US line is
flatter, the opportunity cost for
cheese is lower in the US, whereas
the opportunity cost for wine is
higher
12
US
A
n
Fra
Production Possibilities Line
ce
MRT=0.5
2
2
MRT=2.0
12
24
Cheese
Comparative Advantage

Autarky means a countries production
and consumption are exactly the same

This is usually the equilibrium of supply
and demand
Comparative Advantage
Wine
Autarky Production/Consumption
24
Cheese (units)
Wine (units)
US
16
4
France
3
2
World Total
19
6
12
US
A
n
Fra
ce
2
2
12
24
Cheese
Comparative Advantage
Autarky Production/Consumption
Cheese (units)
Wine (units)
US
16
4
France
3
2
World Total
19
6
Specialized Production
Cheese (units)
Wine (units)
US
24
0
France
0
8
World Total
24
8
Net Gains
Cheese (units)
Wine (units)
5
2
Comparative Advantage
Both countries benefit as a result of specialization and trade
Consumption/Production After Trade
Cheese (units)
Wine (units)
Consumption Production Consumption Production
US
16+2=18
24
4+1=5
0
France
3+3=6
0
2+1=3
8
World Total
24
24
8
8
US imports 5 units of wine; France imports 6 units of cheese
Terms of Trade = 5 wine/6 cheese or 5/6 wine/cheese
Wine
Comparative Advantage
We can also see
graphically the terms of
trade
24
12
US
A
n
Fra
ce
2
2
12
24
Cheese
Comparative Advantage
p. 23
Tractors
Wool
Total
Country A
aLT=1/20
aLW=1/200
L=10
Country B
aL*T=1/10
aL*W=1/150
L*=10
Which country has the absolute advantage in Tractors? Wool?
Tractors – aLT(1/20) < aL*T(1/10) = A
Wool – aLW(1/200) < aL*W(1/150) = A
Which country has the comparative advantage in Tractors? Wool?
Tractors – aLT(1/20)
aL*T(1/10)
“A” requires 10 resources / Tractor
<
=
aLW(1/200)
aL*W(1/150)
“B” requires 15 resources / Tractor
Wool -
aLW(1/200)
aL*W(1/150)
<
aL*T(1/10)
“B” requires 1/15 resources / bale of Wool
=
aLT(1/20)
“A” requires 1/10 resources / bale of Wool
“A” has a comparative advantage in Tractors, “B” has a comparative advantage in Wool
Comparative Advantage
Tractors
The slopes of both countries are flat,
but the slope for Country A is slightly
more sloped than Country B
Wool
Comparative Advantage
Tractors
Autarky Production/Consumption
Wool
Tractors
Wool
Country A
100
1000
Country B
50
750
World Total
150
1750
Comparative Advantage
Autarky Production/Consumption
Tractors
Wool
Country A
100
1000
Country B
50
750
World Total
150
1750
Specialized Production
Tractors
Wool
Country A
200
0
Country B
0
1500
World Total
200
1500
We have a gain
a loss in
Net Gains/Losses
Tractors
Wool
50
-250
in Tractors, but
Wool
Comparative Advantage

For comparative advantage to be effective, we must have a
gain in both goods
Specialized Production
Resources Used
Tractors
Wool
Country A
10
0
200
0
Country B
0
10
0
1500
200 (+50)
1500 (-250)
World Total
Partially Specialized Production
Resources Used
Tractors
Wool
Country A
9
1
180
200
Country B
0
10
0
1500
180 (+30)
1700 (-50)
World Total
Partially Specialized Production
Resources Used
Tractors
Wool
Country A
8
2
160
400
Country B
0
10
0
1500
160 (+10)
1900 (+150)
World Total
Comparative Advantage
Both countries benefit as a result of specialization and trade
Consumption/Production After Trade
Tractors
Wool
Consumption Production Consumption
Production
Country A
100+5=105
160
1000+75=1075
400
Country B
50+5=55
0
750+75=825
1500
World Total
160
160
1900
1900
“A” imports 675 bales of wool; “B” imports 55 Tractors
Terms of Trade = 675 wool/55 tractors or 135/11 wool/tractors
Comparative Advantage






Transport and tariffs may modify the gains from trade
by increasing costs
Opportunity costs may change as resources are
moved from one industry to another
Increasing speculation may yield advantages in terms
of economies of scale
If concentrating on a narrow range of products, a
sudden change in demand could cause severe
problems
Exchange rates may vary affecting opportunity cost
ratios
Imperfect competition could mean that prices do not
reflect opportunity cost ratios in some countries