Transcript Wine - theglobaleconomyduq

Why Do Nations Trade . . .?
Economics is based on. . .
• Supply and Demand
And
• Incentives
Market-Oriented Economic
System
Market-Oriented Economic
System includes . . .
Basic Competitive Model:
• Consumers making rational choices
• Profit Maximizing Firms
• Highly competitive markets
Market-Oriented Economic
System also needs
•
•
•
•
•
•
•
Incentives
Price System
Property Rights – to use it and sell it
Inequality i.e., acceptance of. . . .
(almost) free markets . .
Belief in the benefits of efficiency
An understanding of cost benefit analysis
Market-Oriented Economic
(Price) System vs . . .
•
•
•
Rationing system
Pure free market/libertarianism
Strong government regulatory system
Market-Oriented Economic
(Price) System vs . . .
•
Command economy
•
•
•
•
•
State owned enterprises
Communist
Socialism
national socialism
Mixed market economies
Market-Oriented Economic (Price)
System vs . . .
- The International economy (trade and
finance, etc.) is based on a mix of
economic systems, but primarily a
market-based, free trade system
- Every economic system must deal with it
on those terms
- The global economy – international
trade, finance, investment – is more freemarket than most domestic economies
Capitalism vs Everything Else
- What are the alternatives?
- Is capitalism the worst possible system?
. . . . except for all the rest?
- Should economic results be even, with
little opportunities for change?
- Should foreign trade be
- Free?
- Fair?
Bilateral vs Multilateral Trade
• Virtually all trade is multilateral
• No country can just have bilateral trade
• Too much emphasis on bilateral balances
• Need not be a zero sum game, but gains
are not equal
• Exposes trading nations to external factors
and makes them interdependent
• Cannot survive without trade
Current Issues
•
China has slowly allowed its currency to
appreciate
• Japan has struggled to depreciate its
currency's position
• Germany has resisted EU bailouts
• Perimeter of EU barely hanging on to Euro
Risks include:
• Debt crisis worsening in EU and in US
• Lack of consumer and business
confidence
Chinese Yuan
Source: St Louis Fed
Japanese Yen
Source: St Louis Fed
Euro
Source: St Louis Fed
Trade Weighted Value of US$
Source: St Louis Fed
Daily Foreign Exchange Trading
Source: BIS via WSJ
Opportunity Costs
Everything has an opportunity cost
Resources (time, capital, labor) are finite
• Going to the movies
• Going to college
• Public infrastructure investments
• Private financial investments
Sunk Costs
• An Economic Cost – that can be
discounted.
• Should take them into account before
deciding, but ....
• Example: Mortgage Loan Application
Fees
Marginal Costs vs
Marginal Benefits
To do something or not to do something –
trade offs are critical to most decisions
• Related to opportunity costs
Examples
• Reducing carbon emissions
- Tire pressure rules in California???
• Auto safety standards
Opportunity Set
• Group of available options
• Involve Trade-offs, i.e. what is possible
• Involve Budget Constraints
• Time Constraints
• Consumption Curve
CDs
Opportunity Set
A group of available options
Budget constraints for individuals
12
Borrowing?
$120 available
savings?
6
DVDS
Guns
Production Possibility Curve
and Diminishing Returns . . . for
societies
Note: Curved line vs.
straight line
Butter
Diminishing Returns
Efficiency and productivity decline the more
inputs are used
Trade Between Countries
• Countries trade to increase economic wellbeing. Trade will affect three main internal
markets:
• Product
• Labor
• Capital
Comparative vs Absolute
Advantage
Labor Cost of Producing Computers & Wheat
US
Japan
Labor for one
computer (# hrs)
100
120
Labor for one ton of
wheat (# hrs)
5
8
Cost of one computer
20 tons of wheat
15 tons of wheat
Cost of 100 tons of
wheat
5 computers
6.66 computers
PROBLEM #9
Resources Needed
England
Portugal
One bbl of
wine
One bale of
wool
One bbl of
wine
One bale of
wool
120 workers
100 workers
80 workers
90 workers
PROBLEM #9
Resources Needed
Different Production Costs
England
Portugal
One bbl of
wine
One bale of
wool
One bbl of
wine
One bale of
wool
1.2 bales
of wool
0.833 bbls
of wine
0.88 bales
of wool
1.125 bbls
of wine
Assumption:
Single Product Production with 72,000
workers in each country
England
Portugal
Bbls of wine
Bales of wool
Bbls of wine
Bales of wool
600
0
900
0
0
720
0
800
Wool
800
720
OPPORTUNITY SETS
Portugal
Production
Possibilities
England
Production
Possibilities
600
900
Wine
Assumption:
Single Product Production with 72,000
workers in each country
England
Portugal
Bbls of wine
Bales of wool
Bbls of wine
Bales of wool
600
0
900
0
0
720
0
800
Production/consumption with 36,000 workers in
each sector; no trading
England
Portugal
Wine
Wool
Wine
Wool
300 bbls
360 bales
450 bbls
400 bales
Total Production/consumption: Wine: 750, wool: 760
Why would Portugal Trade?
PROBLEM #9, cont.
After trade: consumption outcome
England
Portugal
Wine
Wool
Wine
Wool
0
720 bales
855 bbls
40 bales
0
72,000
workers
68,400
workers
3,600 workers
Total Production: Wine: 855 (+105), wool: 760 (no change)
Comparative Advantage vs.
Absolute Advantage (see Stiglitz pp 42-43)
US
China
Airplanes
Garments
Airplanes
Garments
Initial Production
Point
200
10,000
200
10,000
Revised
Production Point
300
9,000
100
20,000
Net Change in
Joint Production
No net change in aircraft
production
9,000 net additional
garments (in China)
Trade
Possibilities
US Exports 100 aircraft,
imports 4,500 garments
China imports 100 aircraft,
exports 4,500 garments
+3,500 garments (net)
+4,500 garments (net)
Additional
Consumption
Comparative Costs for Airplanes and Garments
Production
US
China
100 airplanes
1,000 garments
10,000 garments
10,000 garments
1,000 airplanes
100 airplanes
Garments
PRODUCTION POSSIBILITIES
China’s
Production
Possibilities
20,000
(Stiglitz, p. 42-43)
Marginal Rate of
Transformation
E’
E
10,000
E’’
9,000
US Production
Possibilities.
100
200
300
Airplanes Produced
PROBLEM #11
Initial Situation with Total 240,000 worker hours, no trade and
labor equally divided among industries within countries
European Union
Cost Labor
Output #
United States
Car
Truck
Car
Truck
100
600
80
400
0.166
trucks
6 cars
0.2 trucks
5 cars
1200
200
1500
300
Total Production: 2700 cars, 500 trucks
Trucks
600
OPPORTUNITY SETS
U.S.
Production
Possibilities
400
EU Production
Possibilities.
Cars
2,400
3000
PROBLEM #11
Problem: Increase car production by 10 units, leave
Truck production unchanged
Private Consumption
EU
Consumption with Trade
US
EU
US
Cars
Trucks
Cars
Trucks
Cars
Trucks
Cars
Trucks
1200
200
1500
300
1205
200
1505
300
Total cars: 2700
Total trucks: 500
Total cars: 2710
Total trucks: 500
PROBLEM #11
Problem: Increase car production by 10 units, leave
Truck production unchanged
1. US produces 50 fewer cars and adds ten additional Trucks
2. EU drops 10 Trucks, increases car production by 60 units
3. US exchanges 10 Trucks with Europe for 55 cars