A PPC

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A PPC

• Suppose the two goods a country is producing are
  Defense and Non-defense?
  
• What will the PPC look like?

2
Here is a possible curve. What does it tell us?
Defense
200
150
100
50
50
100
150
Non-defense
3
Is point F possible? What does it mean?
Defense
200
F
(100,50)
150
100
50
150
50
100
Non-defense
4
Is point G possible? What does it mean?
Defense
G
200
(175,150)
150
100
50
50
100
150
Non-defense
5
Trade

• Every country has a PPC.
• Every country can produce any combination given
  by its PPC.
  
• BUT, can the countries get more?

6
Comparative Advantage Exercise

• Choose a partner -- everyone must have a
  partner.
  
• One of you is Mexico, one the United States --
  you choose.
  
• Here are the PPC for Mexico and the U.S.

7
PPC
Percent of Resources Devoted to U.S. M
exico Trucks Computers Trucks Computers Trucks C
omputers 100 0 5 0
4 0 0 100 0 10
0 2
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PPC

• Now, plot your PPC

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PPCs
10
PPC

• Now, select a point that each of you like on your
  PPC.
  
• Circle it in pen.

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Such as this for the US - 6 computers and 2 truc
ks
10 9 8 7 6 5 4 3 2 1
Computers
U.S.
Mexico
1 2 3 4 5
trucks
12
Such as this for Mexico -- 1 computer and 2 trucks
10 9 8 7 6 5 4 3 2 1
Computers
U.S.
Mexico
1 2 3 4 5
trucks
13
Trade

• See if you can find a way to trade trucks and
  computers so that both Mexico and the US are
  better off -- each gets more of something without
  getting less of something else.
• You have five minutes.

14
Suppose Mexico gave up 1 computer. How many
trucks would the US give for it?
10 9 8 7 6 5 4 3 2 1
Computers
U.S.
Mexico
1 2 3 4 5
trucks
15
Trade

• The US would give at most, 2 computers for 1
  truck.
  
• Mexico would accept at the minimum 1 computer for
  2 trucks.
  
• Thus, a deal could be reached where, for example,
  the US gives Mexico 2 computers and Mexico gives
  the US 2 trucks. The US is better off and Mexico
  is better off
• Another deal would have the US exchanging 1
  computer for 1 truck. The US would be better off
  and Mexico better off.

16
Trade

• Consider two countries, Haiti and Cuba.
• Each has a PPC, just as every country.

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Haitis PPC
Health Care
1000
500
5
10
Food Production
21
Trade

• OK, that was Haitis PPC. Now, look at Cubas

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And this is Cubas PPC
Health Care
1000
500
5
10
Food Production
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Gains from Trade

• Suppose each nation wants to provide at least 500
  people health care.
  
• How much food can Haiti then produce?

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Health Care
Haitis PPC -- at 500 health care get 7 food
1000
500
------------

5
10
7
Food Production
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Gains from Trade

• How much can Cuba produce if it produces 500
  health care?

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Gains from Trade

• Can they trade and be better off?

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Gains from Trade (cont...)

• If Haiti specializes in health care it can care
  for how many people?
  
• If Cuba specializes in health care it can care
  for how many people?

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Gains from Trade (cont.)

• If Haiti specializes in health care it can care
  for 1000 people.
  
• If Cuba specializes in health care it can care
  for only 500 people.
  
• Clearly Haiti is better at producing health care
  than Cuba is.
  
• Then is Cuba better at food production than Haiti?

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Gains From Trade (cont.)

• If Haiti produces only food, it gets 10 tons.
• If Cuba produces only food, it gets 10 tons.
• So, neither is relatively better in food
  production. What to do?
  
• If Haiti specializes in health care and Cuba in
  food, then they could trade.

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Gains From Trade (cont.)

• Suppose Haiti offers Cuba health care for 500
  people what can Cuba offer in return?
  
• Haiti would trade only if it could get more than
  7 tons of food in return for health care for 500
  people.

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Gains and Specialization

• The gains from trade for Haiti are from just
  above 0 tons of food to just less than 3 tons of
  food.
  
• The gains from trade for Cuba are any food that
  Cuba gets in addition to having 500 people
  provided health care.

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Health Care
Gains from Trade to Haiti
1000
__
500
5
10
Food Production
38
Health Care
1000
Gains from Trade to Cuba
500
5
10
Food Production
39
Each country gains from trading--no one loses
40
What about the exercise of Mexico and the U.S.?

• Which country should specialize in computers and
  which in trucks?

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Trade

• The US gives up 1 truck for 2 computers.
• Mexico gives up 2 trucks for 1 computer.
• So, it costs the US more to produce trucks than
  it does Mexico.
  
• The US has a higher opportunity cost for
  producing trucks than Mexico.

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Trade

• We say that the US has a comparative advantage in
  computers and Mexico has a comparative advantage
  in trucks.
  
• The US can trade up to 2 computers for 1 truck
  without being worse off.
  
• Mexico can trade up to 2 trucks for 1 computer
  without being worse off.

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Why are there gains?

• What enables countries - and individuals as well
  - to gain by trading or exchanging their
  production with others?

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Gains and Specialization

• There are gains when trade occurs because people
  can produce where they have an advantage.
  
• Haiti is clearly better in producing health care.
  But, this means that Haiti would have to give up
  more health care if it were to produce only food
  than does Cuba. Thus, we say Cuba has a
  comparative advantage in food

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Specialization (cont.)

• Notice that comparative advantage is measured in
  terms of relative opportunity costs.
  
• Cubas opportunity costs of producing health care
  were higher than Haitis. Thus, Cuba produces
  food.

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Specialization (cont.)

• Why would a country have a comparative advantage
  in hi-tech manufacturing?
  
• Why would a country have a comparative advantage
  in agriculture?
  
• Why would a country have a comparative advantage
  in textiles -- sewing clothes?