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Principles Of Economics Mankiw > Chapter 3 (15-16 July 2016)

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message 1: by Sang (new)

Sang | 58 comments Mod
Chapter 3 reading nots.


message 2: by Karen (new)

Karen | 27 comments A Parable(比喻) for the Modern Economy
1) Production Possibilities
2) Specialization and Trade
Trade allows each of us to specialize in doing what we do best.

Comparative Advantage: The Driving Force of Specialization
1) Absolute Advantage, the ability to produce a good using fewer inputs than other producers.
2) Opportunity Cost and Comparative Advantage
Although is possible for one person to have an absolute advantage in both goods, it is impossible for one person to have a comparative advantage in both goods. If a person’s opportunity cost for one good is relatively high, the opportunity cost for another good must be relatively low.
3) Comparative Advantage and Trade
Trade can benefit everyone in society because it allows people to specialize in activities in which they have comparative advantage.
4) The Price of Trade
For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.

Applications of Comparative Advantage
1) Should Tom Brady Mow His Own Lawn?
2) Should the US Trade with Other Countries?

Interdependence, 相互依存
Broil 烤(烤箱)
Grill 烧烤(明火)
Prudent, careful and using good judement
Occasion, opportunity
Fanciful, 奇怪的,稀奇,不现实
Mow, 修剪
Pundit, someone who is an expert in a subject, and is often asked to talk to the public about the subject. 评论员


message 3: by [deleted user] (new)

Chapter 3 Interdependence and the Gains from Trade

3.1 absolute advantage(less inputs,more production) vs. comparative advantage(smaller opportunity cost)


3.2 the price of the trade must lie between the two opportunity costs in order to benefit both parties.

3.3 economists use the principle of comparative advantage(there are gains from specialization and trade) to advocate free trade among countries.


message 4: by Sang (new)

Sang | 58 comments Mod
Chapter 3 Interdependence And The Gains From Trade

A Parable for the Modern Economy
Trade between farmer and rancher
Question: If the rancher is better at raising cattle AND better at growing potatoes than the farmer, should the rancher still trade with farmer?

By trade with each other, both rancher and farmer consume more meat and potatoes.

Comparative Advantage: The driving force of specialization

Absolute Advantage: the ability to produce a good using fewer inputs than another producer.
Economists use the term Absolute Advantage when comparing the productivity of one person, firm, or nation to that of another.

Opportunity cost: whatever must be given up to obtain some item

Comparative Advantage: the ability to produce a good at a lower opportunity cost than another producer.
Economists use the term Comparative Advantage when describing the opportunity cost of two producers.

The gains from specialization and trade are based not on absolute advantage but on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises.

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.

Imports: goods produced abroad and sold domestically
Exports: goods produced domestically and sold abroad.


message 5: by Sang (last edited Jul 17, 2016 02:52AM) (new)

Sang | 58 comments Mod
Review question 7
A

Shirt Computer
American 100 20
Chinese 100 10

When each worker spend half of time producing each good,
One chinese worker produces 50 shirts and 5 computers
One American work produces 50 shirts and 10 computers.

B.
Opportunity cost:


Opportunity Cost Shirt Computer
American ⅕ computer 5 shirts
Chinese 1/10 computer 10 shirts

The opportunity cost of one shirt for Chinese is 1/10 computer, for American is ⅕ computer. The opportunity cost for Chinese is lower, so Chinese will export shirts.

Both country will benefit from trade. This is because trade allows each country to specialize in the area where the country has comparative advantage.

C. The two countries might trade when the price of computer is between the opportunity costs of the computer for the two countries.

Opportunity cost for A is 5 shirts.
Opportunity cost for C is 10 shirts.

Suppose trading price is 8 shirts.

Chinese will produce 100 shirts. It take out 40 shirts to trade for 5 computers. So the Chinese worker will have 60 shirts and 5 computers.
The American worker will product 25 shirts and 15 computers. He sells 5 computers for 40 shirts. So the American work will have 65 shirts and 10 computers.
Both Chinese worker and American worker are better off.

D.
If Chinese catches up with American worker in productivity, both of Chinese and American will have same opportunity cost. Trade will not take place. The American economic well-being is not imporved. The Chinese economic well-being is improved.


message 6: by TINA (new)

TINA | 1 comments Question 7
a. When workers in each country spend half of time producing each good,
an American worker can produce 50 shirts and 10 computers.
a Chinese worker can produce 50
shirts and 5 computers

b. If these two countries were open to trade, China would export shirts. Because the opportunity cost in China is lower.
opportunity cost of shirt:
1/5 computer in America
1/10 computer in China

Both country will benefit from trade. Suppose China will produce 100 shirts in a year, and America will produce 20 computers. If 6 computers can exchange 50 shirts, as a result of trade, China can consume 6 computers and 50 shirts, America can consume 14 computer and 50 shirts.
Both China and America are better off.

c. The two countries could trade at the prices of computers (in terms of shirts) between 5 to 10.
It is between the opportunity cost of computer for the two countries.

d. Suppose that China catches up with American productivity, so the productivities in the two countries are
totally equal. Neither the absolute advantage nor the comparative advantage exists in these two countries. There is no more trade between them.
This advance in Chinese peoductivity will improve the Chinese economic well-being, but is no affection to American's.


message 7: by Karen (new)

Karen | 27 comments Question 7
A

B: China would export shirts if these countries were open to trade. China’s opportunity cost of a pcs of shirt is 1/10 pcs of computer which is lower than America’s opportunity, 1/5 pcs of computer. So China has comparative advantage on producing shirts.
Both countries would benefit from trade. By specializing in the produce of shirts or computers, although the production of shirts keeps the same at 100 pcs per year, the production of computers grows from 15 pcs per year to 20. Both countries share the benefit by trading computers or shirts at the price which is lower than their opportunity cost of them. For example, China will get more than 5 computer by trading half of its yearly production, 50 pcs of shirt. And America will get more than 50 pcs of shirt at a price lower than their opportunity cost. This will bring a surplus of computer.

C: Both countries might trade shirt at the price between 1/10 to 1/5 of one computer, and computer at the price between 5 to 10 pcs of shirt. If the price higher than the opportunity cost of the counterpart, both countries would want to sell. If the price lower than the opportunity cost of the counterpart, both countries would want to buy. Then no trade would happen. So China and America would bargain a price within the range of the opportunity cost of both.

D: Both countries might trade for different design and quality of shirt and computer if China increases its productivity to same level of America. Both citizens would enjoy a better quality and designed product of shirt and computer at a lower price.


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