Econ103 - Slides - Ch03.pptx

PowerPoint Presentations for Principles of Microeconomics Ninth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Ninth Canadian Edition by Marc Prud’Homme Universit...

PowerPoint Presentations for Principles of Microeconomics Ninth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Ninth Canadian Edition by Marc Prud’Homme University of Ottawa Copyright © 2024 Cengage Learning Ltd. 3-1 INTERDEPENDENC E AND THE GAINS FROM TRADE Chapter 3 Copyright © 2024 Cengage Learning Ltd. 3-2  INTERDEPENDENCE AND THE GAINS FROM TRADE  One of the ten principles of economics highlighted in Chapter 1 is that trade can make everyone better off.  This principle explains why people trade with their neighbours and why nations trade with other nations.  What exactly do people gain when they trade with one another?  Why do people choose to become interdependent? 3 Copyright © 2024 Cengage Learning Ltd. 3-3  A PARABLE FOR THE MODERN ECONOMY  Imagine that in the world there are: 1. Two goods  Meat and potatoes 2. Two people  Cattle Rancher (Ruby) and Potato Farmer (Frank)  Each would like to eat both meat and potatoes.  Trade leads to greater variety. 3 Copyright © 2024 Cengage Learning Ltd. 3-4  A PARABLE FOR THE MODERN ECONOMY  Frank can raise cattle and produce meat, but he is not very good at it.  Ruby can grow potatoes, but her land is not very well suited for it.  Frank and Ruby can each benefit by specializing in what they do best and then trade with the other.  The gains from trade are less obvious, however, when one person is better at producing every good. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-5  A PARABLE FOR THE MODERN ECONOMY PRODUCTION POSSIBILITIES  PRODUCTION POSSIBILITIES FRONTIER shows the various mixes of output that an economy can produce.  It illustrates one of the ten principles of economics in Chapter 1: People face tradeoffs. 3- Copyright © 2024 Cengage Learning Ltd. 3-6 1a  FIGURE 3.1 The Production Possibilities Frontier 3- Copyright © 2024 Cengage Learning Ltd. 3-7 1a  FIGURE 3.1 The Production Possibilities Frontier (cont’d) 3- Copyright © 2024 Cengage Learning Ltd. 3-8 1a  Active Learning Production and Consumption with and without Trade  Two countries: Canada and Japan  Two goods: computers and wheat  One resource: labour (measured in hours)  We will look at how much of both goods each country produces and consumes under two scenarios:  If the country chooses to be self-sufficient  If it trades with the other country 3-1 Copyright © 2024 Cengage Learning Ltd. 3-9  Active Learning Production and Consumption with and without Trade (cont’d) To draw Canada’s PPF…  Canada has 50 000 hours of labour available for production per month.  Producing one computer requires 100 hours of labour.  Producing one tonne of wheat requires 10 hours of labour. Computers appear on the horizontal axis. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-10  Active Learning Answers: Canada’s PPF Wheat (tonnes) Canada has enough labour to 5000 produce 500 computers, or 5000 tonnes of wheat, or any 4000 combination along the PPF. 3000 2000 1000 Computers 0 100 200 300 400 500 3-1 Copyright © 2024 Cengage Learning Ltd. 3-11  Active Learning Answers: Canada without Trade Wheat (tonnes) Suppose Canada uses half its 5000 labour to produce each of the two goods. 4000 Then it will produce and 3000 consume 250 computers and 2500 tonnes of wheat. 2000 1000 0 100 200 300 400 500 Computers 3-1 Copyright © 2024 Cengage Learning Ltd. 3-12  Active Learning Production and Consumption with and without Trade (cont’d) To draw Japan’s PPF…  Japan has 30 000 hours of labour available for production per month.  Producing one computer requires 125 hours of labour.  Producing one tonne of wheat requires 25 hours of labour. Computers appear on the horizontal axis. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-13  Active Learning Answers: Japan’s PPF Wheat (tonnes) Japan has enough labour to 2000 produce 240 computers, or 1200 tonnes of wheat, or any combination along the PPF. 1000 0 Computers 100 200 300 3-1 Copyright © 2024 Cengage Learning Ltd. 3-14  Active Learning Answers: Japan without Trade Wheat (tonnes) Suppose Japan uses half its labour to produce each good. 2000 Then it will produce and 1000 consume 120 computers and 600 tonnes of wheat. 0 Computers 100 200 300 3-1 Copyright © 2024 Cengage Learning Ltd. 3-15  Active Learning Consumption with and without Trade  Without trade  Canadian consumers get 250 computers and 2500 tonnes of wheat.  Japanese consumers get 120 computers and 600 tonnes of wheat.  We will compare consumption without trade to consumption with trade.  First, we need to see how much of each good is produced and traded by the two countries. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-16  Active Learning Production under Trade 1. Suppose Canada produces 3400 tonnes of wheat. How many computers would Canada be able to produce with its remaining labour?  Draw the point representing this combination of computers and wheat on Canada’s PPF. 2. Suppose Japan produces 240 computers. How many tonnes of wheat would Japan be able to produce with its remaining labour?  Draw this point on Japan’s PPF. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-17  Active Learning Answers: Canada’s Production with Trade Wheat (tonnes) 5000 Producing 3400 tonnes of wheat requires 34 000 4000 labour hours. The remaining 16 000 labour 3000 hours are used to produce 160 computers. 2000 1000 Computers 0 100 200 300 400 500 3-1 Copyright © 2024 Cengage Learning Ltd. 3-18  Active Learning Answers: Japan’s Production with Trade Wheat (tonnes) Producing 240 computers requires all of Japan’s 30 2000 000 labour hours. So, Japan would produce 0 tonnes of wheat. 1000 0 Computers 100 200 300 3-1 Copyright © 2024 Cengage Learning Ltd. 3-19  Active Learning Consumption under Trade Suppose Canada exports 700 tonnes of wheat to Japan and imports 110 computers from Japan. (Alternatively, Japan imports 700 tonnes of wheat and exports 110 computers.)  How much of each good is consumed in Canada?  Plot this combination on Canada’s PPF.  How much of each good is consumed in Japan? 3-1  Plot this combination on Japan’s PPF. Copyright © 2024 Cengage Learning Ltd. 3-20  Active Learning Answers: Canada’s Consumption with Trade Wheat (tonnes) 5000 computers wheat produced 160 3400 4000 + imported 110 0 3000 – exported 0 700 = amount 270 2700 2000 consumed 1000 Computers 0 100 200 300 400 500 3-1 Copyright © 2024 Cengage Learning Ltd. 3-21  Active Learning Answers: Japan’s Consumption with Trade Wheat (tonnes) computers wheat produced 240 0 2000 + imported 0 700 – exported 110 0 = amount 130 700 1000 consumed Computers 0 100 200 300 3-1 Copyright © 2024 Cengage Learning Ltd. 3-22  Active Learning Answers: Trade makes everyone better off Canada 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 3-1 wheat 600 700 100 3-23 Copyright © 2024 Cengage Learning Ltd.  Active Learning Answers: Trade makes everyone better off (cont’d) Wheat  Point F: 100 (tons) (tonn es) 6,000 computers, 3000 600 0 5,000 500 tonnes of wheat  Point F requires 0 4,000 400 40 000 hours of 0 3,000 300 labour. 0 FF 2,000 200 Possible but not 0 1,000 100 efficient: could get 0 0 more of either good 0 100 200 300 400 500 600 without sacrificing Computers 3-1 any of the other Copyright © 2024 Cengage Learning Ltd. 3-24  A PARABLE FOR THE MODERN ECONOMY SPECIALIZATION AND TRADE  After several years of eating combination B, Ruby gets an idea and goes to talk to Frank. 3- Copyright © 2024 Cengage Learning Ltd. 3-25 1b  FIGURE 3.2 How Trade Expands the Set of Consumption Opportunities 3- Copyright © 2024 Cengage Learning Ltd. 3-26 1b  FIGURE 3.2 How Trade Expands the Set of Consumption Opportunities (cont’d) 3- Copyright © 2024 Cengage Learning Ltd. 3-27 1b  Quick Quiz 1. Before Frank and Ruby 2. After Frank and Ruby engage in trade, each engage in trade, each a. consumes at a point inside a. consumes at a point inside their production possibilities their production possibilities frontier. frontier. b. consumes at a point on their b. consumes at a point on their production possibilities frontier. production possibilities frontier. c. consumes at a point outside c. consumes at a point outside their production possibilities their production possibilities frontier. frontier. d. consumes the same amounts d. consumes the same amounts of meat and potatoes as the of meat and potatoes as the other. other. 3-1 Copyright © 2024 Cengage Learning Ltd. 3-28  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION  If Ruby is better at both raising cattle and growing potatoes, how can Frank ever specialize in doing what he does best?  Frank doesn’t seem to do anything best.  To solve this puzzle, we need to look at the principle of comparative advantage. 3-2 Copyright © 2024 Cengage Learning Ltd. 3-29  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION ABSOLUTE ADVANTAGE  ABSOLUTE ADVANTAGE: the comparison among producers of a good according to their productivity 3- Copyright © 2024 Cengage Learning Ltd. 3-30 2a  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION OPPORTUNITY COST AND COMPARATIVE  Rather ADVANTAGE than comparing inputs required, we can compare the opportunity costs.  OPPORTUNITY COST: whatever must be given up to obtain some item 3- Copyright © 2024 Cengage Learning Ltd. 3-31 2b  TABLE 3.1 The Opportunity Cost of Meat and Potatoes 3- Copyright © 2024 Cengage Learning Ltd. 3-32 2b  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION COMPARATIVE ADVANTAGE AND TRADE  COMPARATIVE ADVANTAGE: the comparison among producers of a good according to their opportunity cost 3- Copyright © 2024 Cengage Learning Ltd. 3-33 2c  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION COMPARATIVE ADVANTAGE AND  The gains from TRADE (CONT’D) specialization and trade are based not on absolute advantage but rather on comparative advantage.  When each person specializes in producing the good for which they have a comparative advantage, total production in the economy rises.  Each benefits from trade by obtaining a good at a 3- 2c price that is lower than their opportunity cost of Copyright © 2024 Cengage Learning Ltd. 3-34  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION COMPARATIVE ADVANTAGE AND TRADE (CONT’D)  The moral of the story: Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage. 3- Copyright © 2024 Cengage Learning Ltd. 3-35 2c  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION THE PRICE OF TRADE  What determines the price at which trade takes place?  How are the gains from trade shared between the trading parties?  For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. 3- Copyright © 2024 Cengage Learning Ltd. 3-36 2d  Quick Quiz 3. In an hour, Mateo can 5. When Mateo and Sophia wash 2 cars or mow 1 lawn, produce efficiently and make and Sophia can wash 3 cars a mutually beneficial trade or mow 1 lawn. Who has the based on comparative absolute advantage in car advantage, washing, and who has the absolute advantage in lawn a. Mateo mows more and mowing? Sophia washes more. a. Mateo in washing; Sophia in b. Mateo washes more and mowing Sophia mows more. b. Sophia in washing; Mateo in c. Mateo and Sophia both wash mowing more. c. Mateo in washing; neither in d. Mateo and Sophia both mow mowing more. 3-2 Copyright © 2024 Cengage Learning Ltd. 3-37 d. Sophia in washing; neither in  APPLICATIONS OF COMPARATIVE ADVANTAGE SHOULD CONNOR MCDAVID SHOVEL  HIS OWN SIDEWALK? McDavid can shovel his sidewalk faster than anyone else. But should he? 3- Copyright © 2024 Cengage Learning Ltd. 3-38 3a  APPLICATIONS OF COMPARATIVE ADVANTAGE SHOULD CANADA TRADE WITH OTHER  Just as individualsCOUNTRIES? can benefit from specialization and trade with one another, so can populations of people in different countries.  IMPORTS: goods and services produced abroad and sold domestically.  EXPORTS: goods and services produced domestically and sold abroad.  The principle of comparative advantage states that 3- 3b each good should be produced by the country that Copyright © 2024 Cengage Learning Ltd. 3-39  APPLICATIONS OF COMPARATIVE ADVANTAGE SHOULD CANADA TRADE WITH OTHER  COUNTRIES? The opportunity (CONT’D) cost of a car is 2 tonnes of food in Canada but only 1 tonne of food in Japan, Japan has a comparative advantage in producing cars.  Japan should produce more cars than it wants for its own use and export some of them to Canada.  The opportunity cost of a tonne of food is 1 car in Japan but only 1/2 car in Canada; Canada has a comparative advantage in producing food.  Canada should produce more food than it wants to consume and export some to Japan. 3- Copyright © 2024 Cengage Learning Ltd. 3-40 3b  Quick Quiz 6. A nation will typically 8. Kayla can cook dinner in 30 import those goods in which minutes and wash the laundry in 20 minutes. Her roommate takes a. the nation has an absolute twice as long to do each task. advantage. How should the roommates b. the nation has a comparative allocate the work? advantage. a. Kayla should do more of the c. other nations have an cooking based on her comparative absolute advantage. advantage. d. other nations have a b. Kayla should do more of the comparative advantage. washing based on her comparative advantage. c. Kayla should do more of the washing based on her absolute advantage. 3-3 Copyright © 2024 Cengage Learning Ltd. 3-41  Classroom Activity A Short Trip with Many Contributors Answer the following questions: 1. Think of a recent trip you have taken. The distance travelled is unimportant; just choose a specific trip. Where did this trip start and finish? 2. Who produced the goods and services that made your trip possible? (List as many types of workers as possible.) 3. How were the different elements of your trip financed 3 (e.g., the vehicle, the road network, or the airport)?3-42 Copyright © 2024 Cengage Learning Ltd. THE END Copyright © 2024 Cengage Learning Ltd. 3-43