Transcript Click Here for PowerPoint file containing all samples

Problem as Given in MEL
Notice: Similar Exercise Button
Allows You to Rework the Problem
Until You get the Concept and Grade
that You Desire.
COMPARATIVE
ADVANTAGE and
GAINS from TRADE
HOW to WORK THROUGH the PROBLEM…
Steps:
This problem asks about gains from trade. First
you must determine comparative advantage
and who produces how much of what….
1. Opportunity Cost: You must calculate
Opportunity Cost to determine comparative
advantage. Hint: (loss/gain)
France: O.C. of Cloth = 14/25  .56 wine
Spain: O.C. of Cloth = 9/5  1.8 wine
France: O.C. of Wine = 25/14  1.78 cloth
Spain: O.C. of Wine = 5/9  .55 cloth
2. Comparative Advantage: Now You must
determine comparative advantage:
Country/Person with lowest opportunity cost
has the comparative advantage in that
product.
France has lowest OC in cloth
Spain has lowest OC in wine
3. Specialization: So how much will country
produce
France can produce 25 cloth units per hour
Spain can produce 9 wine units per hour
4. Production: ( AFTER specialization)
France:
25 units/hr X 500 hrs = 12,500 cloth units; 0 wine units
Spain:
0 cloth units; 9 units/hr X 500 hrs = 4,500 wine units
5. Trade: *Trade agreement = 1 unit cloth for 1 unit wine (specifically 700 for 700)
Consumption: ( BEFORE specialization)
France:
11,250 cloth units;
700 wine units
Spain:
700 cloth units;
3,240 wine units
Consumption: ( AFTER specialization and Trade)
France:
12,500 – 700 = 11,800 cloth units;
+700 wine units
Spain:
+700 cloth units;
4,500 – 700 = 3,800 wine units
6. Gains from Trade:
*The question asks for the ADDITIONAL units of CLOTH consumed by France
11,800 – 11,250 = 550 units of cloth
*The question asks for the ADDITIONAL units of WINE consumed by Spain
3,800 – 3,240 = 560 units of wine
Problem as Given in MEL
COMPARATIVE
ADVANTAGE and
GAINS from TRADE
HOW to WORK THROUGH the PROBLEM…
Steps:
1. Paragraph 1: (The United States)
Simply look at the chart and see who can produce the
most
2. Paragraph 2: (Mexico)
Now you must calculate Opportunity Cost to determine
comparative advantage. Hint: (loss/gain)
If the US goes from producing 12 to 18 tons tacos, they gain
6 tons tacos but lose 10 tons hamburgers. Thus, their
O.C. for tacos = 10/6 or 1 and 2/3
If Mexico goes from producing 10 to 15 tons tacos, they
gain 5 tons tacos but lose 1 ton hamburgers. Thus, their
O.C. for tacos = 1/5
So Mexico (with the lower O.C.) has the comparative
advantage in tacos.
3. Paragraph 3: (before trade)
US: 20 tons Hamburgers, 6 tons Tacos
Mexico: 2 tons Hamburgers, 5 tons Tacos
4. Paragraph 3: (specialization)
*based on who has the comparative advantage
US: 30 tons Hamburgers, 0 tons Tacos
Mexico: 0 tons Hamburgers, 15 tons Tacos
5. Paragraph 3: (After Trade)
*Trade agreement is not given.
*The question asks for the TOTAL ADDITIONAL tacos and hamburgers
Before: 22 tons Hamburgers, 11 tons Tacos (see step 3)
After: 30 tons Hamburgers, 15 tons Tacos (see step 4)
Difference: 8 tons Hamburgers, 4 tons Tacos (Total Gains from Trade)
Problem as Given in MEL
GAINS from
TRADE
HOW to WORK THROUGH the PROBLEM…
Steps:
1. Paragraph 1: (before Trade)
You: 4 Bananas, 8 Coconuts
Neighbor: 5 Bananas, 5 Coconuts
2. Now you must calculate Opportunity Cost to determine
comparative advantage. Hint: (loss/gain)
3. Paragraph 2: (specialization)
You: 0 Bananas, 24 Coconuts
Neighbor: 30 Bananas, 0 Coconuts
* This is determined by looking at production possibilities on the
graph
4. Now you must trade with your partner
*Trade agreement is ½ production for ½ production.
5. Paragraph 3: (After Trade)
You: 15 Bananas, 12 Coconuts
Neighbor: 15 Bananas, 12 Coconuts
6. Paragraph 4 & 5 (gains from trade calculated)
You: 11 Bananas, 4 Coconuts
Neighbor: 10 Bananas, 7 Coconuts
* These totals are calculated by comparing # of products after
trade from the # of products held originally (before trade).
Example: You have 15 bananas in step 5 after trade but only had
4 bananas in step 1 before trade. Thus, you have 11 additional
bananas – proof of gain from trade.
So both of you are better off after trade.
It may be easier if you were to come in for me to explain this, but I will try.
I drew in the green lines to show you that without the tarrif you were at 3 and 6 Billion
With the tariff you are at 4 and 5 Billion
Area A=(3*.5)+ ((3-4)*.5)/2  1.5+.25  1.75
Consumer &
Area B= ((3-4)*.5)/2  .25
Producer
Area C=(4-5)*.5  .5
Surplus
Area D=((5-6)*.5)/2  .25
1st ?aboveArea A +AreaB+AreaC+AreaD
2nd?aboveArea A
3rd ?aboveAreaB+AreaD
Problem as Given in MEL
CONSUMER and
PRODUCER
SURPLUS
HOW to WORK THROUGH the PROBLEM…
I will give you the calculations for the consumer surplus area. You can then determine the producer portion of the question.
Consumer Surplus in competitive equilibrium.
Areas A, B, C-This is the triangular area above the equilibrium point - as depicted in your text.
Can be figured all as one Thus you take the quantity represented times the $ amount represeneted
2.4M x $1400 (2800-1400)
$3360 BUT this is for the entire square area...the consumer surplus is the lower triangle area or 1/2 the square.
THUS, $3360/2=$1680
Consumer surplus with rent control (where the $1050 price hits the curve)
Areas A, B, D
D= (1400-1050)x1.2
D= 420
B= (2100-1400)x1.2
B= 840
A= ((2800-2100)x1.2)/2 (must divide by two because it is a triangle)
A= 420
Total CS = 420+840+420
CS = 1680
This can be found on page 107 of your text.
Problem as Given in MEL
Labor Force &
Unemployment
Rates
HOW to WORK THROUGH the PROBLEM…
To Solve:
* Indicates portions of the formula provided in the
question. So you use the unemployment rate
formula first because you have the most
information for this one.
First: you plug .06 in for the unemployment rate,
X in for the unemployment number and X + 135.2
in for labor force. Once you solve for x you should
get 8.63 as the number for X or unemployment.
Once you have this number add it to the
employed number (135.2) and you have the labor
force number of 143.8.
NOTE: If you use the “guided solution” button you will get the
following hints including the formulas needed
*
*
*
Now you have enough information to plug .675 in
for LFPR and 143.8 for labor force and solve for X
or working age population and you should get
213.
Problem as Given in MEL
Calculating GDP
HOW to WORK THROUGH the PROBLEM…
First:
You must determine whether to use the income or
expenditure approach. This determination is made
depending on which calculation method you have
enough information to perform. Thus, you must first
determine whether each item provided is used in the
income or expenditure approach. You have more
information for the Expenditure Approach. This is
good because you will not have to determine the
statistical discrepancy and make adjustments since
the expenditure approach is the more reliable
method.
I
To Solve: You plug in the numbers you have into the
formula.
GDP = C + I + G + NX
GDP = 724 + 204 + 282 + (334-398)
GDP = 1146
**
*
*
*
**
*
FORMULAS
Expenditure Approach:
GDP = C + I + G + NX
(Consumption, Investment, Government, Net Exports)
Income Approach:
GDP = W + I + R + P + Indirect taxes – Subsidies + Depreciation
(Wages, Interest, Rent, Profit)
Problem as Given in MEL
Real/Nominal
Wage Increase
HOW to WORK THROUGH the PROBLEM…
To Solve:
FORMULAS
Real Wage Rate in 2006 = (Nominal wage rate in 2006 / CPI in 2006) *100
Percent Change = ((New # - Old #) / Old #) *100
#1: The numbers given in the problem
are Nominal numbers. Thus, you can
simply use typical mathematical
Percent Change formula.
% Change = ((New # - Old #) / Old #)
*100
% Change = (1150-1000)/1000 *100
% Change = 15%
#2: First the wages must be converted
to REAL wages. Then the typical
percent change formula can be utilized.
RWR Yr 1 = $1000/125*100
RWR Yr 1 = $800
RWR Yr 2 = $1150/140*100
RWR Yr 2 = $821.43
% Change = (821.43-800)/800*100
% Change = 2.6%
HOW to WORK the Problem...
Calculate Nominal GDP:
2009
Fish: 110*2=220
Berries: 50*6=300
Total: $520
2010
Fish: 85*5=425
Berries: 75*10=750
Total: $1175
Calculate Real GDP:
2009
(Real=Nominal in base year)
Total: $520
Calculate Percent Change:
New-old/old = %change
2010
(use base year prices to
remove the effect of inflation)
Fish: 85*2=170
Berries: 75*6=450
Total: $620
(100 / 520)*100 = 19.2%
(($620-520)/$520)*100=19.2%
Nominal vs Real
GDP & %Change
Problem as Given in MEL
Step 1: Draw out graph for visual clarity (Graph
was drawn using ‘online graph tool’ and the data in
the schedule provided)
Step 2: solve math problems
See shaded areas and calculations on the next
slide -below
Consumer &
Producer Surplus &
Dead weight loss
HOW to WORK THROUGH the PROBLEM…
Step 1: Draw out graph for visual clarity (Graph
was drawn using ‘online graph tool’ and the data in
the schedule provided)
Step 2: solve math problems
(Q1): CS(at$40) = (($50-$40)*20 )/2 = $100
(Q2): CS(at$30) = (($50-$30)*40)/2 = $400 Thus
change in CS = $100 - $400 = $-300
(Q3): PS(at$40) = $400 (from below) – (($30$20)*(40-20))/2 (dead weightloss) + (($40$30)*($20-0)) (additional PS) = $500
(Q4): PS(at$30) = (($30-$10)*40)/2 = $400 Thus
change is PS = $500 - $400 = $100
(Q5): (($30-$20)*(40-20))/2 (dead weightloss from
Q3) *2 = $200
Shaded areas represent $40 price
Grey = DWL, Green=CS, Blue=PS
$400
HOW to WORK the Problem...
Answer to firstArea A+B+C/2
Answer to secondadd Area D to
above total
*Note*
1. The question asks for TOTAL
surplus, you have to add consumer
and producer surplus together
2. If the U.S. does not trade
internationally they do not pay the
world price – they stick to the
equilibrium in their market
Consumer /
Producer
Surplus
Problem as Given in MEL
Notice: One of the Study Plan extra
problems is This Question with
VARIOUS efficiency scenarios!
Comparative
Advantage
HOW to WORK THROUGH the PROBLEM…
Steps:
1. Either read the chart or graph the PPF in order to see that
2. Determine attainability of the 30 pizza / 30 loaves of bread combination within the 40 hrs stated.
1. If Foodland produces 30 pizzas …… it would take them 10 hours of labor according to the PPF/chart
2. The assumption in the question is that they have 40 hours……this means they have 30 hrs left
3. If Foodland produces bread with the remaining 30 hours then…..
4. According to the PPF/chart they would be able to produce 30 loaves of bread….this combinations is Attainable.
3. Determine efficiency of the 30 pizza / 30 loaves of bread combination within the 40 hrs stated.
1. All hours were used to make the 30 pizza / 30 loaves combination (no hours left over) …
2. …. this means that this point of production is on the PPF curve or efficient.
4. Efficiency implies a trade off is necessary to produce one more unit of either item.
5. Opportunity cost must be calculated:
1. O.C. = Loss/gain  O.C. of Item A = loss of Item B / gain of Item A
2. I want to make more pizza…… 20 pizza’s are gained when move from 30 to 50 <I am now using 20 hrs>
3. <with 20 hours left I can produce 20 loaves of bread> I lose 10 loaves of bread when I move from 30 to 20
4. O.C. of pizza = 10/20 = .5
Problem as Given in MEL
Title Here
HOW to WORK THROUGH the PROBLEM…