Econ 103 - Chapter 3 Example 1 PDF

1  Example Two countries: – The U.S. and Japan Two goods: – Computers and wheat One resource: – Labor, measured in hours How much of both goods each country produces and consumes – If the country chooses to be self-sufficient – If it trades with the other country...

1  Example Two countries: – The U.S. and Japan Two goods: – Computers and wheat One resource: – Labor, measured in hours How much of both goods each country produces and consumes – If the country chooses to be self-sufficient – If it trades with the other country 2  Production Possibilities in the U.S. – The U.S. has 50,000 hours of labor available for production, per month – Producing one computer requires 100 hours of labor – Producing one ton of wheat requires 10 hours of labor 3 The U.S. PPF Wheat The U.S. has (tons) enough labor to 5,000 produce 500 computers, 4,000 3,000 or 5,000 tons of wheat, 2,000 or any combination 1,000 along the PPF. Computers 0 100 200 300 400 500 4 The U.S. Without Trade Wheat Suppose the U.S. (tons) uses half its labor to 5,000 produce each of the two goods. 4,000 3,000 Then it will produce and consume 250 2,000 computers and 2,500 tons of wheat. 1,000 Computers 0 100 200 300 400 500 5 Active Learning 1 Derive Japan’s PPF Use the following information to draw Japan’s PPF. – Japan has 30,000 hours of labor available for production, per month. – Producing one computer requires 125 hours of labor. – Producing one ton of wheat requires 25 hours of labor. Your graph should measure computers on the horizontal axis. 6 Active Learning 1 Japan’s PPF Wheat Japan has enough labor to (tons) produce 240 computers, 2,000 or 1,200 tons of wheat, or any combination along 1,000 the PPF. 0 Computers 100 200 300 7 Japan Without Trade Wheat Suppose Japan uses (tons) half its labor to produce each good. 2,000 Then it will produce and consume 120 1,000 computers and 600 tons of wheat. 0 Computers 100 200 300 8  Consumption With and Without Trade Without trade: U.S. consumers get 250 computers and 2500 tons wheat Japanese consumers get 120 computers and 600 tons wheat Comparison – Consumption without trade vs. consumption with trade – We need to see how much of each good is produced and traded by the two countries 9 Active Learning 2 Production under trade A. Suppose the U.S. produces 3400 tons of wheat. – How many computers would the U.S. be able to produce with its remaining labor? – Draw the point representing this combination of computers and wheat on the U.S. PPF. B. Suppose Japan produces 240 computers. – How many tons of wheat would Japan be able to produce with its remaining labor? – Draw this point on Japan’s PPF. 10 Active Learning 2 A. U.S. Production With Trade Wheat (tons) Producing 3,400 tons of wheat requires 34,000 5,000 labor hours. 4,000 The remaining 16,000 3,000 labor hours are used to produce 160 computers. 2,000 1,000 Computers 0 100 200 300 400 500 11 Active Learning 2 B. Japan’s Production With Trade Wheat Producing 240 (tons) computers requires all of Japan’s 30,000 labor 2,000 hours. So, Japan would produce 1,000 0 tons of wheat. 0 Computers 100 200 300 12  Exports and Imports Imports – Goods produced abroad and sold domestically Exports – Goods produced domestically and sold abroad 13 Active Learning 3 Consumption under trade Suppose the U.S. exports 700 tons of wheat to Japan, and imports 110 computers from Japan. (Japan imports 700 tons wheat and exports 110 computers.) A. How much of each good is consumed in the U.S.? Plot this combination on the U.S. PPF. B. How much of each good is consumed in Japan? Plot this combination on Japan’s PPF. 14 Active Learning 3 A. U.S. Consumption With Trade Wheat computers wheat (tons) produced 160 3400 5,000 + imported 110 0 4,000 – exported 0 700 = amount 270 2700 3,000 consumed 2,000 1,000 Computers 0 100 200 300 400 500 15 Active Learning 3 B. Japan’s Consumption With Trade computers wheat Wheat produced 240 0 (tons) + imported 0 700 2,000 – exported 110 0 = amount 130 700 consumed 1,000 0 Computers 100 200 300 16 Trade Makes Both Countries Better Off U.S. consumption consumption gains from without trade with trade trade computers 250 270 20 wheat 2500 2700 200 Japan consumption consumption gains from without trade with trade trade computers 120 130 10 wheat 600 700 100 17