Chapter 3-Interdependence and Gain from Trade PDF

Subject ECO202: Principles of Microeconomics Chapter 3: Interdependence and Gains from Trade Instructor: Vrak Thanit Teaching Manual  Table of Content 01 Discussion 02 Review 03 Class Activities...

Subject ECO202: Principles of Microeconomics Chapter 3: Interdependence and Gains from Trade Instructor: Vrak Thanit Teaching Manual  Table of Content 01 Discussion 02 Review 03 Class Activities 04 Homework & Exercise 2  1. Discussion 1. Why do people trade? 2. What is absolute and comparative advantage? 3. How do people gain from trade with absolute advantage? 4. How do people gain from trade with comparative advantage? 5. Does the concept of comparative advantage can always prove that trade make everyone better off? 3  2. Review: Key Concept Trade Absolute Advantage Lower use of input Specialization Comparative Advantage Lower Opportunity Cost Price of Trade 4  2. Review: Learning Outcome Two kinds of Trade Gains from Trade Advantages Comparative Advantage People specialized in the Increase Quantity of G&S activities that they are have When a person has the smaller opportunity cost of comparative advantage producing the good Increase variety of G&S Trade makes everyone Absolute Advantage better off => Free trade When a person can produce the good with a smaller quantity of inputs 5  2. Review: Synthesis The fundamental lessons are: (1) Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.; (2) To gain from trade, it can be done through each side of trade to produce G&S with smaller quantity of inputs (absolute advantage) or with smaller opportunity cost (comparative advantage); and (3) Economists use the principle of comparative advantage to advocate free trade among countries 6  3. Class Activities: Trade Simulation Students will be arranged in pair to find out how to make a gain from trade. Simulation will be conducted in Microsoft Excel 7  4. Homework and Exercises Quick Quiz 1. In an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing? a. Mateo in washing, Tyler in mowing. b. Tyler in washing, Mateo in mowing. c. Mateo in washing, neither in mowing. d. Tyler in washing, neither in mowing. 8  4. Homework and Exercises Quick Quiz 2. Once again, in an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing? a. Mateo in washing, Tyler in mowing. b. Tyler in washing, Mateo in mowing. c. Mateo in washing, neither in mowing. d. Tyler in washing, neither in mowing. 9  4. Homework and Exercises Quick Quiz 3. When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage, a. they both obtain consumption outside their PPF. b. they both obtain consumption inside their PFF. c. one individual consumes inside her PPF, while the other consumes outside hers. d. each individual consumes a point on her own PFF. 10  4. Homework and Exercises Quick Quiz 4. Which goods will a nation typically import? a. those goods in which the nation has an absolute advantage b. those goods in which the nation has a comparative advantage c. those goods in which other nations have an absolute advantage d. those goods in which other nations have a comparative advantage 11  4. Homework and Exercises Quick Quiz 5. Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these nations trade? a. China will export aircraft, and the United States will export shirts. b. China will export shirts, and the United States will export aircraft. c. Both nations will export shirts. 12 d. There are no gains from trade in this situation.  4. Homework and Exercises Quick Quiz 6. Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do each task. How should the roommates allocate the work? a. Kayla should do more of the cooking based on her comparative advantage. b. Kayla should do more of the washing based on her comparative advantage. c. Kayla should do more of the washing based on her absolute advantage. 13 d. There are no gains from trade in this situation.  4. Homework and Exercises Quick Quiz 7. Identify which of the following statement in True or False. a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.” T b. “Certain talented people have a comparative advantage in everything they do.” F c. “If a certain trade is good for one person, it can’t be good for the other one.” F d. “If a certain trade is good for one person, it is always good for the other one.” F e. “If trade is good for a country, it must be good for everyone in the 14 country.” F  4. Homework and Exercises Homework: Question for Review 1. Explain how absolute advantage and comparative advantage differ. 2. Is absolute advantage or comparative advantage more important for trade?. 3. If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie? 4. Why do economists oppose policies that restrict trade among nations? 15  4. Homework and Exercises Exercise: Problems & Applications 1. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods. b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier. c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label 16 this point on your diagram. Should Canada accept the deal?  4. Homework and Exercises Exercise: Problems & Applications a. Opportunity cost of a car is 30/2 = 15 bushels of wheat Opportunity cost of a bushel of wheat is 2/30 = 1/15 of a car b. Car (million) 20 A 10 150 300 Wheat (million of bushel) 17  4. Homework and Exercises Exercise: Problems & Applications c. Cost of 1 car = 15 bushel of Wheat Car (million) Price of trade: 1 car = 20 bushel of wheat => Canada 20 (1) produce all 20 million cars (2) trade 10 million cars with 200 million bushel of A B wheat 10 (3) has 10 million cars remaining + 200 million of bushel of wheat 150 300 Wheat (million of bushel) 18  4. Homework and Exercises Exercise: Problems & Applications 2. England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage? b. If England and Scotland decide to trade, which commodity will Scotland export to England? Explain. c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade? Explain. 19  4. Homework and Exercises Exercise: Problems & Applications Opportunity Cost Comparative Advantage Absolute Advantage of sweater England 50 scones Scone Scone Scotland 20 scones Sweater Sweater b. England produces scone and Scotland produces Sweater. They exchange 1 sweater = (>20 – 50< scones) c. If a Scottish worker could produce only 1 sweater per hour, it still can gain from trade because Opportunity Cost of sweater is 40 scones < 50 scones. However, to gain from trade this time, they need to exchange 1 sweater = (>40 – 50< scones) 20  4. Homework and Exercises Exercise: Problems & Applications 3. A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A French worker takes 600 hours to produce a car and X hours to produce a case of wine. a. For what values of X will gains from trade be possible? Explain. b. For what values of X will Germany export cars and import wine? Explain. 21  4. Homework and Exercises Exercise: Problems & Applications a. Gains from trade be possible, when X has value different from 3. b. For Germany to export cars, - it must have the comparative advantage in producing cars and France must have the comparative advantage in producing wine - opportunity cost of 1 car in Germany is 200 cases of wine - When XX