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Econ 4.3
Wednesday, April 28, 1999
Announcements: Exam #4 makeup is
8:15 pm on Thursday 4/29 in 403 Kern. The final quiz will be on
Friday on Chapter 20.
Points Possible
| a. |
Exams 1-4 |
400 |
| b. |
Final Quiz |
30 |
| c. |
HW (4pt x 8) |
32 |
| d. |
Online Quizzes (10pt x 10) |
100 |
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Total |
562 |
Lecture notes:
Law of Comparative Advantage : David
Ricardo (Concept is Counterintuitive)
- Absolute advantage: a nation can produce a
particular good or service with less resources than any
other country. Most efficient
- Comparative advantage: a natoin should
specialize in producing the good or service it is least
innefficient in producing (with the lowest economic
opportunity cost) and trade with other nations.
Scenario: Output per Labor Year
- Suppose...
- US Production Possibilities:
- 80 VCRS
- 80 Wood Burning Stoves
- German Production Possibilities:
- 20 VCRS
- 60 Wood Burning Stoves
- US Efficiency Positions
- US is 4 times as efficient
in VCR output (80/20)
- US is 1.33 times as
efficient in stove output (80/60)
- US - VCR opportunity cost
= 1 stove
- Germany - VCR opportunity
cost = 3 stoves
- Assume: US transfers 1000 workers
from stove to VCR production; Germany transfers
2000 workers from VCR to stove production.
Gains from Trade
| US |
Germany |
Total |
| + VCRS 80,000 |
- VCRS 40,000 |
+ 40,000 |
| - Stoves 80,000 |
+ Stoves 120,000 |
+ 40,000 |
World Supply and Demand Equilibrium
Free Trade
| Exporting Country A |
Notation |
Importing Country B |
| Da |
domestic demand |
Db |
| Sa |
domestic supply |
Sb |
| Pa |
domestic price |
Pb |
- Sx = Sa - Da {exports} ::: Sm = Db - Sb
- [Da = Sa - Sx] : Sx = Sm : [Db = Sb + Sm]
- Pw = Pa = Pb, where Pw is world price
Tariffs Versus Quotas
- Quotas raise producers profits (domestic
and foreign)
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