Transcript comparative advantage

Can you tell me what these mean?
Definitions:
Opportunity Costs, Resources are scarce, trade-off,
incentive, specialization, equilibrium, interaction of
choices, efficiency.
Economic Models: Trade-Offs
and Trade
BU 204 MACROECONOMICS
CHAPTER 2
What you will learn in this chapter:
Why models?
Simplified representations of reality play a crucial
role in economics.
Three simple but important models:
Production possibility frontier
Comparative advantage
Circular-flow diagram
The difference between positive economics and
normative economics.
When economists agree and why they sometimes
disagree.
Models in Economics:
A model is a simplified representation of a real
situation that is used to better understand real-life
situations.
The production possibility frontier (PPF) illustrates
the trade-offs facing an economy that produces only
two goods. It shows the maximum quantity of one
good that can be produced for any given production
of the other.
Tom’s Trade-offs: The Production Possibility
Frontier
Figure 2-2 Increasing Opportunity Cost
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Economic Growth
7
Production
is initially
at in
Economic
The
economy
growth
can now
results
point
A (20
fish
25 PPF
an outward
produce
more
shift
ofand
everything.
of the
coconuts),
 it can move to
because production
point
E (25 fish
30
possibilities
are and
expanded.
coconuts).
Production Possibility Frontier
 Improve understanding of trade offs
 Illustrates efficiency
 Shows opportunity costs
 See economic growth
With Trade a country can consume outside its
PPF
PPF Efficiency
1.
Point A to B show
increase in number of
computers and
decrease in food
produced.
2.
Resource are taken
from food to produce
computers.
3.
All points on curve
show maximum
productive efficiency
4.
Points inside curve are
feasible but inefficient
5.
Points outside of curve
are
infeasible
Opportunity
Costs and
Trade-offs
Production Possibility Curve
Comparative Advantage Model
 An individual has “comparative advantage” in producing
a good if the opportunity cost is lower than it would be for
someone else
 An individual has “absolute advantage” if he/she can
produce more than someone else can
 Comparative advantage not absolute
advantage is the basis for gains in trade
Figure 2-4 Production Possibilities for Two Castaways
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Figure 2-5 Comparative Advantage and Gains From Trade
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Table 2-2
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Circular Flow Diagram
 Model that shows transactions by flows around a




circle
Household defined as a person or group who share
their income
A firm is an organization that produces good or
service
Market for Goods-where firms sell
Factor Markets-where firms buy resources
Figure 2-7 The Circular-Flow Diagram
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Figure 2-8 Growth in the U.S. Economy from 1962 to 1988
Krugman and Wells: Microeconomics
Copyright © 2005 by Worth Publishers
Economics
Positive economics: How economy really works
Normative economics: How the economy should work.
For fun: (Positive? or Negative?)
-More than 60% of women are in labor force
-Rent control laws should be implemented because thy help
achieve fairness
-Society should take measures to end gun violence
-People who smoke pass on increased medical costs
to society
Quick Review
1-Why are models used in economics?
2-Technological improvement will shift curve in which
direction?
3-If an economy is producing at level of output that is
on the PPF curve, it is using resources efficiently?
Non-efficiently? Is it using all it resources?
4-An economy has the lowest opportunity cost for
producing a particular good when it has an absolute
or comparative advantage?
More Review
5-What are some types of factors of production?
6- Which graphical model shows us how households
buy goods and services and sell factors of production.
7-Trade is beneficial to an economy because more
goods and services can be obtained at a lower
_______________.
Graphing




Important to Know:
X- horizontal axis (quantity)
Y-vertical axis (Price)
Horizontal Intercept: x=0
Vertical Intercept : y=0
Homework
Graph, and question related to graph, should
similar to (next slide)
3. Absolute vs. comparative advantage
10. Economic models
11. Positive vs. Normative economics.
1.
Homework #3
Peter Pundit, an economic reporter states that the
EU is increasing productivity in all industries. He
claims that this productivity advances in output
will soon exceed U.S. and as a result U.S. will not
longer benefit from trade with EU.
a. Do you think Peter is correct? What is the source
of his mistake?
b. If the EU and the U.S. Continue to trade, what
will characterize the goods that EU exports to
U.S., and the good U.S. exports to EU?
Sample PPF (# 1)
The End of Chapter 2
Coming attraction:
Chapter 3:
Supply and Demand
Thank you attending!