Welcome to Econ 414 International Economics

1
Welcome to Econ 414 International Economics

• Study Guide
• Week Two
• Ending Sunday, September 9
• (Note You must go over these slides and complete
  every task outlined here before the end of the
  day on September 8)

2
Chapter 2 Make sure you understand the following
topics and can answer the related questions. If
not, ask me your questions

• What are the similarities and the differences
  between international and interregional trade?
• Make sure you understand Figure 2.1 and the
  discussion that goes along with it
• What are the main points of this discussion?
• Why do the two nations trade?
• How does the trade affect the price in each
  country?
• Is everyone better off?
• What is the effect of trade

3

• Mercantilism (1700s)
• Why did they stress exports over imports?
• What does it mean when they say trade is a zero
  sum activity?
• Adam Smith (1723 (Scotland)-1790)
• What did he mean when he said that trade was not
  a zero sum activity?
• What does absolute advantage mean?
• David Ricardo (1772(Netherlands)-1823)
• What was his major contribution?
• How is comparative advantage different from
  absolute advantage?
• Can a nation have comparative advantage but
  absolute disadvantage in production of good A?
  If so, how? If not, why not?

4
What is Absolute Advantage

• A nation has an absolute advantage in production
  of widgets over its trade partner if
• it can produce one widget using fewer resources
  than its trade partner or
• using all of its resources it can produce more
  widgets than its trade partner
• Example
• if US uses 20 hours of labor to produce a car and
  Japan uses 18 hours of labor to produce a car,
  then Japan has absolute advantage in production
  of car over US
• If in one day US uses all of its resources to
  produce just cars, it can produce 100 cars. If in
  one day Japan uses all of its resources to
  produce just cars, it can produce 150 cars. Again
  Japan has absolute advantage.

5
Production Possibilities Frontier (PPF)

• A curve that shows the different combinations of
  two goods that a nation can produce efficiently,
  with a given amount of resources and a given
  technology in a given period of time

6
Example US PPF for shoes and cars

• Slope 20 opportunity cost of one car
  marginal rate of transformation
• This PPF is linear, meaning that the opportunity
  cost of one car is always 20 pairs of shoes

shoes
1000
PPF
cars
50
7
Example

• In the absence of trade, a nation can choose any
  point on this curve.
• Suppose the nation picks to produce and consume
  at point A

shoes
1000
PPF
A
600
cars
50
20
8
Comparative Advantage

• A nation has a comparative advantage in
  production of a good if it can produce that good
  at a lower opportunity cost compared to its trade
  partner
• Example
• In our example, the opportunity cost of one car
  in the US is 20 pairs of shoes.
• If the opportunity cost of one car in Spain is 40
  pairs of shoes, then the US has a comparative
  advantage in production of cars over Spain.

9
Definition

• A nation is better off as a result of trade if it
  consumes no less of any goods and more of at
  least one good after trade.

10
Example

• If as a result of trade, we can have at least 20
  cars but more than 600 pairs of shoes we will be
  better off. (point B or to the right of it)
• Or if as a result of trade, we can have at least
  600 shoes but more than 20 cars then we will be
  better off. (point C or to the left of it)

shoes
1000
B
PPF
A
600
C
cars
50
20
11
Assignment 1

• Is posted on the homepage of WebCT
• It is due on or before Thursday, September 6 at
  noon
• To complete this assignment you need to work in
  groups of 2 or 3. One of you will be the
  representative of Germany and one or two of you
  will be representing the United States.
• Send your assignments to me as an email
  attachment to khorassj_at_marietta.edu