International Trade and Labor Economics Quiz

International Politics and Market Economy - Economics Part - Tutorial 1

• Tutorial given by Tim Hug, University of St. Gallen, on November 12, 2024
• Focuses on core economic principles, marginal analysis, supply and demand, labor markets, and international trade models.

The Marginal Principle

• A decision-making process that considers incremental changes.
• Key question: What happens if we do a little more (or less)?
• Example applications: Producing an extra pencil, hiring a new worker, consuming another glass of water.

Important Concepts

• Marginal Cost: Additional cost of producing one more unit of a good or service. (e.g., producing an extra pencil, requires an additional hour of work).
• Marginal Benefit: Additional benefit obtained from producing or consuming one more unit of a good or service. (e.g., selling an extra pencil yields $20 in revenue).
• Optimal Decision Making: Continue producing until marginal benefit equals marginal cost – profits/utility are maximised.

Sunk Cost Fallacy

• The tendency to continue an endeavor even when additional costs outweigh expected benefits.
• Example: Continuing to watch a movie that's disappointing because you've already invested time in it.
• Rational choice: Stop if the expected enjoyment from continuing is less than the expected enjoyment from switching to a more interesting movie.

Supply and Demand

• Law of Demand: Quantity demanded decreases as price increases.
• Law of Supply: Quantity supplied increases as price increases.
• The interaction of supply and demand determines market equilibrium.

Neoclassical Labor Market Theory

• Perfectly Competitive Market: Assumed for simplicity

• Firms aim to maximize profits (max p • F(L,) - w • L).

• Households aim to maximize utility, considering consumption and labor supply (max U(C, L) s.t. p • C = w • L).

• Labor demand = marginal product of labor(MPL) = marginal cost (MC).

• Labor supply increases with income, but comes at a cost in terms of utility loss.

Equilibrium

• Excess demand drives wages up.
• Excess supply drives wages down.
• In equilibrium, labor market clears (no involuntary unemployment).

Labor & Capital

• Production function: F(L,K)
• Upward-sloping and concave
• MPL is increasing in K (implied by FLK >0)
• What happens to labor demand when K increases?

High-Skilled & Low-Skilled Labor

• Production function: F(L1,Ln)
• Profit function: Π = F(L1,L1) – W1L1 – WhLn
• Model assumptions: low and high skilled labor are complementary
• How does immigration affect equilibrium? (e.g., low-skilled immigration)

Introduction to International Trade

• Countries trade due to differences (e.g., technology, geography, endowment) and economies of scale. Countries can benefit from specialization.

Differences in Technology

• Opportunity costs: Cost of producing one good in terms of another good.
• Differences in technology drive differences in opportunity costs

Comparative Advantage

• Definition: A country has a comparative advantage in a good if it can produce that good at a lower opportunity cost relative to another country.
• Example: Portugal has a comparative advantage in wine; England in cloth.
• Trade allows countries to benefit from specializing in goods where they have lower opportunity costs.

Gains from Trade

• Countries can gain from trade by specializing in goods where they have a comparative advantage.
• Trade enlarges the consumption possibilities.

Exercises

• Comparative Advantage (Allocation of tasks)
• Ricardian Model (Production Possibility Frontier)

Wrap Up

• Trade patterns are explained by comparative advantage based on technological differences.
• Models do not always perfectly reflect the complexities of real-world situations. Elements such as labor mobility differences, trade frictions, political intervention are important considerations.