INTERDEPENDENCE AND THE GAINS FROM TRADE group MC

 Problem 1: The Parable for the modern economy  Production possibilities  Specialization and Trade  Problem 2: Comparative Advantage: The Driving Force of Specialization  Absolut

INTERDEPENDENCE AND THE GAINS FROM TRADE

Group MC:

Nguyen Le Anh Dao

Do Hoang Hai Anh

Ta Ngoc Quynh Nhu

Vu Thi Ngoc Phuong

Nguyen Vu Hai Thao

Nguyen Thi My Ngan

Vo Thi Kim Hang

 Problem 1: The Parable for the modern economy

 Production possibilities

 Specialization and Trade

 Problem 2: Comparative Advantage: The Driving Force of

Specialization

 Absolute advantage

 Opportunity cost and Comparative Advantage

 Comparative advantage and Trade

 The Price of the Trade

 Problem 3: Applications of Comparative Advantage

 Should Tom Brandy Mow His Own Lawn?

 Should the United States Trade with other Country?

Content





 Specialization refers to the tendency of countries

to specialize in certain products which they trade

for other goods, rather than producing all

consumption goods on their own Countries

produce a surplus of the product in which they

specialize and trade it for a different surplus good

of another country The traders decide on whether

they should export or import goods depending on

comparative advantages.

THE RELATIONSHIP BETWEEN SPECIALIZATION AND TRADE

Problem 2:

Comparative Advantage: The Driving Force of Specialization

 Absolute advantage

 Developed by Adam Smith

 Under free and unregulated trade, a nation should

specialize in producing those goods it could

produce most efficiently (had an absolute

advantage, either natural or acquired)

 The capability of a nation to produce more of a

good with the same amount of input than another

country

THEORY OF ABSOLUTE ADVANTAGE

product when it is more

efficient than any other

country in producing it

What is Smith’s theory of

Absolute Advantage?

→ Countries should specialize in the production of goods for which they have an absolute advantage and they trade these goods for the goods produced by other countries.

=> Country A has an absolute advantage in

the production of both goods.

Example: Assume that

there are only two

countries - Country A and

Country B - producing only

two goods, corn cereal and

designer jeans The table

here shows the production

possibilities for these two

countries Which of the

following statements is

correct?

The ability to produce a good at a lower

opportunity cost than another producer

 OPPORTUNITY COST AND COMPARATIVE ADVANTAGE

 In our example, we assumed that the

farmer and the rancher each spend 8

hours a day working

therefore, takes away from time

available for producing meat

one good to produce units of the other

trade-off between the two goods that

each producer faces

The opportunity cost of meat is the inverse of the opportunity cost of

potatoes

 Economist use the term comparative

advantage when describing the

opportunity cost of two producers

 The producers who gives up less of

other goods to produce good X has the

smaller opportunity cost of

producing good X and is said to have a

comparative advantage in producing

it

 An ounce of potatoes costs the

farmer only ¼ ounce of meat, but it costs the rancher ½ ounce of

meat

opportunity cost of producing meat

than the farmer

advantage in growing potatoes, and

the rancher has a comparative

advantage in producing meat

 Comparative advantage reflects the relative opportunity cost

 Unless two people have exactly the sam opportunity cost, one

person will have a comparative advantage in one good, and the other person will have a

comparative advantage in the

other good

trade are based not on absolute

advantage but on comparative

advantage.

producing the good for which he or she has a comparative advantage, total

product in the economy rise.

 Comparative Advantage:

The Driving Force of

Specialization

 What is comparative advantage?

 An economic law referring to the ability of any given economic actor to produce goods and

service at a lower opportunity cost than other economic actors.

Ex: two countries producing only two goods - motor cars and commercial

trucks.

 Country A can produce

30m cars or 6m trucks,

and country B can

produce 35m cars or 21m trucks.

 country B has the

 Should Tom Brandy Mow His Own Lawn?

Problem 3:

Applications of Comparative Advantage

The principle of comparative advantage

explains interdependence and the gains

from trade.

Opportunity cost of the item is what we give

up to get the item.

What does Tom do with 2 hours?

Mow his own lawns Film the TV show and get

$20,000.

What does Gump do with 4 hours ?

Mow Tom’s lawns Work at McDonald and get $40.

Tom has absolute advantage in mowing

his own lawns because he takes lower

time than Gump (2hrs < 4hrs).

Gump has a comparative advantage in

moving lawns because his opportunity

costs is only $40 but Tom is $20,000.

The better for both of them is Tom films the TV show and hires Gump to mow his lawns

trade

most, with more than $1.4 trillion worth of

exports in 2014

that exports of manufactured goods directly

support approximately 6 million U.S factory

jobs

 Should the United States Trade with other Country?

   The United

States exported

$1.45T and imported

$2.19T in 2014

 Exports of goods and services full year share of U.S GDP at

13.45 percent

in 2013

 The economic benefits of U.S

trade

• Higher Wages

• Increased Economic Growth

• Better Working Conditions

• Supporting more productive, higher paying jobs in our

export sectors

• Expanding the variety of products for purchase by consumers and business

• Encouraging investment and more rapid economic growth