Production, Economic Growth and Trade PDF

Production, Economic Growth and Trade CHAPTER Copyright 2020 Macmillan L...

Production, Economic Growth and Trade CHAPTER Copyright 2020 Macmillan Learning | Chiang | All rights reserved 2  HOMEWORK OPTIONAL ACHIEVE HOMEWORK – CHAPTERS 1 & 2 Take Home Assignment 1 – Questions 1- 7 Submit In-Class Exercises in Word, PDF or jpeg The powerpoint slides should be downloaded and viewed in “presentation mode”. 3 | CHAPTER 2  CHAPTER 2 OBJECTIVES Describe the three basic questions that must be answered by any economy. Describe production and the factors that go into producing various goods and services. Describe the opportunity cost an economy incurs to increase the production of one product. Use a production possibilities frontier (PPF) to analyze the limits of production.  4 | CHAPTER 2  CHAPTER OBJECTIVES Describe economic growth and how it is stimulated by education and training, capital accumulation, and technological improvements. Describe the concepts of absolute and comparative advantage. Explain how specialization and trade can lead to gains for all countries involved. 5 | CHAPTER 2 BASIC ECONOMIC QUESTIONS EACH SOCIETY MUST ANSWER 1. WHAT GOODS AND SERVICES ARE TO BE PRODUCED? Canada? 2. HOW ARE THESE GOODS AND SERVICES TO BE PRODUCED? Temporary foreign workers 3. WHO WILL RECEIVE THESE GOODS AND SERVICES? Engage in trade?  FOUR FACTORS OF PRODUCTION: PRODUCTION (Inputs) THE PROCESS OF CONVERTING FACTORS OF LABOUR PRODUCTION (INPUTS) INTO GOODS AND SERVICES (OUTPUTS)  1. LAND – includes all natural resources: arable land, forests, FACTORS OF rivers, oil reserves, minerals PRODUCTION Resources used to produce goods and services 2. LABOUR – a measure of the work done by human beings 3. CAPITAL – includes all manufactured aids to production – “things that are used to produce other things” such astools, machinery & buildings 4. ENTREPRENURIAL ABILITY – new ideas and innovations PRODUCTION POSSIBILITIES FRONTIER (PPF) Model: Illustrates the combinations of two goods a SOCIETY can produce at full employment (using all available resources – land, labour, capital & ideas) at a given level of technology.  PRODUCTION POSSIBILITIES FRONTIER 12 Linear Slope THIS PPF REPRESENTS A MATH HOMEWORK (Hours) 10 CONSTRANT ON AN INDIVIDUAL. 8 Everyone faces PPF scarcity in terms 6 of time – there are Time spend only 24 hours in a 4 doing day. Math homework 2 means less time for Economics homework. 2 4 6 8 10 12 ECONOMICS HOMEWORK (Hours)  CONSTANT OPPORTUNITY COST Linear Slope BACKPACK TABLETS OPPORTUNITY S 12 0 TO COST: 10 1 PRODUCE 8 2 ONE MORE THE COST OF A TABLET, 6 3 GOOD IN TERMS OF 4 4 TWO ANOTHER THAT 2 5 BACKPACKS MUST BE MUST BE GIVEN UP 0 6 GIVEN UP.  PRODUCTION CONSTANT A OPPORTUNITY COST POSSIBILITIE 12 Linear Slope BACKPACKS (THOUSANDS) S FRONTIER 10 B SCHEDULE 8 C PPF P BACKPACK TABLETS t S 6 D A 12 0 B 10 1 4 E C 8 2 2 F D 6 3 E 4 4 G F 2 5 2 4 6 8 10 12 TABLETS (THOUSANDS) G 0 6 PPF, PPF SHIFTS OUT FROM THE EFFICIENCY ORIGIN AS AN ECONOMY GROWS AS A RESULT OF: AND 1. EXPANDING RESOURCES. ECONOMIC 2. IMPROVING TECHNOLOGIES. GROWTH  INCREASING OPPORTUNITY COST BUNDLE TABLETS PACKS Opportunity Pack Increasing Opportunity Cost Cost of Gaining s 20 Tablets (Slope of PPF gets steeper) a 0 1000 1000O a 95 o b 50 Packs given b 20 950 0 c up 850 o c 40 850 100 Packs d PPF 70 o given up 0 d 60 700 150 Packs 40 ae e 80 400 given up 0 f 100 0 300 Packs given up f0 0 20 40 60 80 10 Tablets 400 Packs 0 given up Calculating Opportunity Cost at the Margin Opportunity Cost of ONE Tablet Give up/Gain BUNDLES Tablets Packs Opportunity Cost of Increasing Opportunity ONE Tablet Cost – each additional a 0 1000 tablet produced requires more packs to be given up 50/20 = 2.5 Packs than previously b 20 950 given up c 40 850 100/20 = 5 Packs given up d 60 700 150/20 = 7.5 Packs given up e 80 400 300/20 = 15 Packs f 100 0 given up 400/20 = 20 Packs given up  INCREASING OPPORTUNITY OPPORUNITY COST INCREASES WITH COST SPECIALIZATION POIN BACKPACKS TABLETS OPPORTUNITY T COST of 1 Tablet gain (Give Up/Gain) a 12,000 0 2,000/3,200 = 0.625 b 10,000 3,200 4,000/2,000 = 2.00 c 6,000 5,200 6,000 / 800 = 7.50 d 0 6,000 PPF Give Up Backpacks 2000 =.625 Gain Tablets 3200 1  AN OUTWARD SHIFT OF THE PPF MEANS ECONOMIC GROWTH. BACKPACKS (THOUSANDS) SHIFTS IN THE PPF PPF1 PPF0 TABLETS (THOUSANDS)  How much growth occurs depends, in part, on a society’s production of capital goods (including human capital) vs. consumer goods SHIFTS CONSUMER GOODS PPF1 IN THE A c PPF0 PPF2 PPF B A society that chooses to produce more capital goods (ie. Adding robotics or computerized machines to production lines) allows labour units to produce more output – over time economic growth is CAPITAL GOODS much larger from pt. B than from pt. A  PRODUCTION EFFICIENCY: GOODS AND SERVICES ARE PRODUCTION PRODUCED AT THEIR LOWEST EFFICIENCY POSSIBLE RESOURCE (OPPORTUNITY) COST. ALLOCATIVE ALLOCATIVE EFFICIENCY: THE EFFICIENCY MIX OF GOODS AND SERVICES IS JUST WHAT SOCIETY DESIRES.  Changes in PPF Outward Shift PPF Inward Shift PPF Movement Along PPF Increased Production Decreased Production Change in Production Combo Of both goods (New Resources) of both goods (Loss of Resources) of Both Goods (Same Resources) Rotation of PPF Point Inside PPF Point Outside PPF New technology used to produce ONE good Inefficient Production Unattainable Production – Scarcity SPECIALIZATION, COMPARATIVE ADVANTAGE, AND TRADE SPECIALIZATION ALLOWS FOR INCREASED PRODUCTION and TRADE ALLOWS FOR INCREASED CONSUMPTION COMPARATI VE ABSOLUTE ADVANTAGE COMPARATIV E ADVANTAGE ADVANTAGE A COUNTRY CAN PRODUCE MORE A COUNTRY HAS IS THE OF A GOOD THAN ANOTHER A LOWER OPPORTUNITY REASON COUNTRY USING THE SAME COST OF PRODUCING A FOR TRADE AMOUNT OF RESOURCES. GOOD THAN ANOTHER COUNTRY.  When choosing between more than two goods: OPPORTUNITY Opportunity Cost is measured as the COST NEXT BEST ALTERNATIVE given up in order to obtain the most preferred good or service 12 DOMESTIC PRODUCTION (Why are the PPF curves linear?) Coffee (Tons) Coff Haiti Dominican Republic ee (Ton 40 s) * DR has an 20 24 a Absolute Advantage 10 a in BOTH goods PPF PPF 8 16 Cocoa 8 20 Cocoa (Tons) (Tons)  COMPARATIVE ADVANTAGE Opportunity Cost is relevant in determining both: AN INIDIVIDUAL COUNTRY’S PRODUCTION and PRODUCTION BETWEEN TRADING PARTNERS LOWER OPPORTUNITY COST = COMPARATIVE ADVANTAGE  COMPARATIVE VS. ABSOLUTE ADVANTAGE DON’T CONFUSE THE CONCEPTS: EVEN THOUGH ONE COUNTRY CAN PRODUCE MORE OF BOTH GOODS, TRADE IS STILL BENEFICIAL. FOCUS ON OPPORTUNITY COSTS: WHICH COUNTRY HAS A LOWER OPPORTUNITY COST OF PRODUCING COFFEE? OF PRODUCING COCOA? 14 COMPARATIVE ADVANTAGE IN COCOA PRODUCTION? Coffee (Tons) Coff Haiti Dominican Republic ee (Ton 40 s) Give Give up/Gain up/Gain 20 Give Up 40/20 = 2 20/16 = Giv 1.25 OC of 1 e Up OC of 1 Cocoa Cocoa is 2 Coffee 0 16 Cocoa 20 Cocoa is 1.25 0 (Tons) Gain (Tons) Gain Coffee 15 WHO SHOULD PRODUCE COCOA ? DOMINICAN COMPARE THE REPUBLIC OPPORTUNITY COST OF Coffee/Cocoa = PRODUCING ONE TON 40/20 OF COCOA Give up 2 TONS OF COFFEE for 1 ton of HAITI cocoa Coffee/Cocoa = HAITI HAS THE 20/16 COMPARATIVE Give up 1.25 TONS ADVANTAGE IN OF COFFEE for 1 PRODUCING COCOA ton of cocoa 16 WHO SHOULD PRODUCE COFFEE ? HAITI COMPARE THE Cocoa/Coffee = OPPORTUNITY COST OF 16/20 PRODUCING ONE TON OF Give up 0.8 TONS COFFEE IN EACH NATION OF COCOA for 1 ton of coffee DOMINICAN REPUBLIC THE DOMINICAN HAS THE Cocoa/Coffee = COMPARATIVE ADVANTAGE 20/40 IN PRODUCING COFFEE Give up 0.5 TON COMPARATIVE COMPARATIVE ADVANTAGE – who gives ADVANTAGE up less of a good? HAITI HAS A LOWER DOMINICAN: OPPORTUNITY COST get 1 ton coffee give up.5 OF PRODUCING tons cocoa HAITI: get 1 ton coffee give up.8 tons COCOA THAN THE cocoa DOMINICAN. DOMINICAN: get 1 ton cocoa give up 2 THEREFORE, IT HAS tons coffee A COMPARATIVE HAITI: get 1 ton cocoa give up 1.25 tons ADVANTAGE IN coffee  18 SPECIALIZATION Coffee Haiti Coffe Dominican Republic e 40 * DOMINICAN REPUBLIC ONLY 20 PRODUCES COFFEE (40) * HAITI ONLY PRODUCES COCOA (16) 16 20 Cocoa Cocoa 19 DOMESTIC PRODUCTION Coffee (Tons) Coff Haiti Dominican Republic ee (Ton 40 s) Domestically a each country 20 24 produces a 10 a combination of Cocoa and Coffee (Point 8 16 Cocoa 8 20 Cocoa (Tons) a) (Tons) FROM 20 TRADE PRODUCTION WITH SPECIALIZATION (tons) Cocoa Coffee Haiti 16 0 Achieved Dominican Republic Shared Total 0 16 40 40 by countries CONSUMPTION BEFORE TRADE/AFTER TRADE (tons) specializing 8 Cocoa 10 Coffee in a good Haiti 8 8 13 24 with a Dominican Republic 8 27 16 34 comparativ Total Gain of 6 tons of coffee16 so each country 40 gains 3 tons 21 CONSUMPTION OUTSIDE OF PPF BOTH COUNTRIES MOVE FROM POINT (a) ON THEIR RESPECTIVE PPFs to POINT (c) BOTH COUNTRIES ARE ABLE TO CONSUME AT A POINT OUTSIDE OF THEIR PPF BY SPECIALIZING 34 | CHAPTER 2 BASIC ECONOMIC QUESTIONS EACH SOCIETY MUST ANSWER 1. WHAT GOODS AND SERVICES ARE TO BE PRODUCED? 2. HOW ARE THESE GOODS AND SERVICES TO BE PRODUCED? 3. WHO WILL RECEIVE THESE GOODS AND SERVICES?  Practice Question 1. Graph the PPF for wine and cloth in Canada and Wine Cloth Portugal. (barrels) (meters) Canad 2. The opportunity cost of (getting) 1 barrel of 50 150 a wine in Canada is? Portu 250 500 gal 3. The opportunity cost of (getting) 1 meter of cloth in Canada is? 4. The opportunity cost of (getting) 1 barrel of wine in Portugal is? 5. Portugal will export wine to Canada, if 1 barrel of wine can be traded for more than how many meter(s) of cloth? 6. Canada will import wine from Portugal provided that 1 meter of cloth trades for more than how many barrel(s) of wine?