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  • Note: Here we assume that labour is the only input (resource). This assumption does not materially change the analysis. Strictly speaking, a country is said to have an absolute advantage in a product over another country, if it can produce it with fewer inputs .
  • Here we assume that labour is the only input
  • The father has a comparative advantage in mowing the lawn, and the son has a comparative advantage in sweeping the path. Each has to do the task he has a comparative advantage in. Note that the father is likely to have absolute advantage in both.
  • Mark Carney is Governor of the Bank of Canada. For more information see http://www.cbc.ca/news/business/story/2011/06/15/carney-banks.html
  • Soviet Official in London
  • The lack of affordable housing for police officers, fire fighters and nurses in Vancouver might cause severe problems during an earthquake. People of these professions live off-island, and will likely be unable to get to Vancouver island quickly in an emergency situation, particularly if some of the bridges collapse. This is an example of a market failure to address the needs of society.
  • Inefficiency
  • In this diagram, the green arrows represent flows of income/payments. The red arrows represent flows of goods & services (including services of the factors of production in the lower half of the diagram). To keep the graph simple, we have omitted the government, financial system, and foreign sector, as discussed on the next slide. Changing the animation on this slide: If you wish, you can easily change the order in which the markets and arrows appear. From the “Slide Show” drop-down menu, choose “Custom Animation…” Then, a box will appear (maybe along the right-hand-side of your PowerPoint window) that allows you to modify the order in which things appear (as well as other aspects of the animation). For further information, open PowerPoint help and search on “change the sequence of animations.”
  • 1-24
  • At A , Hurley has few fish, so an additional fish is very valuable to him. At B , Hurley already has lots of fish, so an additional one is not as valuable to him.
  • Terms of trade = P(Ex) / P(Im)

Topic 1 -_intro_-_to_post Topic 1 -_intro_-_to_post Presentation Transcript

  • International Economics Introduction to International Economics
  • Plan of the Topic 1: Part I: Basics of International Economics Part II: Three economic models
        • Circular Flow Diagram
        • PPF
        • Standard Trade Model
  • Part I: Basics of International Economics
  • Scarcity
  • Do rich people face scarcity?
  • Do poor people face scarcity?
      • What to produce
      • How to produce
      • For whom – who will benefit from it
    THREE Big Questions : WHAT, HOW AND FOR WHOM
  • 1. People face trade-offs Key principles of Economics:
  • Tradeoffs OR
  •  
    • A country is said to have an absolute advantage in a product over another country, if it can produce it with less labour.
    Application: Absolute Advantage
  • Application: Absolute Advantage TABLE 1 Production by 1 worker (L) per day Cloth Wine England 5 rolls 10 barrels Portugal 2 rolls 20 barrels OR OR
  • TABLE 2 Effect of reallocating 1 worker (L) in each country Cloth Wine England +1 L -> +5 rolls - 1 L -> - 10 barrels Portugal - 1 L -> -2 rolls + 1 L -> +20 barrels World output +3 rolls +10 barrels Application: Absolute Advantage
  • In our example:
    • What trade-off does Portugal face?
    • What trade-off does England face?
    Application: Absolute Advantage
  • Key principles of Economics: 1. People face trade-offs 2. The opportunity cost of something is what you have to give up to get it.
  • What is wrong with this picture?
    • A country has a comparative advantage in a product if it can produce that product at a lower opportunity cost than its trading partner.
    Application: Comparative Advantage
  • Application: Comparative Advantage TABLE 3 Production by 1 worker per year Opportunity Cost Auto parts units of Software 1 Auto part 1 units of Software Mexico 50A 10S Canada 100A 50S
  • Application: Comparative Advantage TABLE 4 Effect of reallocating 1 worker (L) in Canada and 3 workers (L) in Mexico Auto parts Software Mexico Canada World Output TABLE 3 Production by 1 worker per year Opportunity Cost Auto parts Software 1 Auto part 1 units of Software Mexico 50A 10S 1A = .2S 1S = 5A Canada 100A 50S 1A = .5S 1S = 2A
  • Application: Comparative Advantage TABLE 4 Effect of reallocating 1 worker (L) in Canada and 3 workers (L) in Mexico Auto parts Software Mexico +3 L -> - 3 L -> Canada - 1 L -> + 1 L -> World Output TABLE 3 Production by 1 worker per year Opportunity Cost Auto parts Software 1 Auto part 1 units of Software Mexico 50A 10S 1A = .2S 1S = 5A Canada 100A 50S 1A = .5S 1S = 2A
  • Application: Comparative Advantage TABLE 5 Effect of reallocating 1 unit of labour in Canada and 1 unit of labour in Mexico Auto parts Units of software Mexico +1 L -> - 1 L -> Canada - 1 L -> + 1 L -> World Output TABLE 3 Production by 1 worker per year Opportunity Cost Auto parts Software 1 Auto part 1 units of Software Mexico 50A 10S 1A = .2S 1S = 5A Canada 100A 50S 1A = .5S 1S = 2A
  • Key principles of Economics: 1. People face trade-offs 2. The opportunity cost of something is what you have to give up to get it. 3. Trade makes people better off
  • Questions
    • Does trade make everyone better off?
    • What do you think of “Protect domestic producer!” and “Buy Canadian!” slogans?
    • http://www.theonion.com/video/more-american-workers-outsourcing-own-jobs-oversea,14329/
  • Key principles of Economics: 4. People respond to incentives 5. Prices convey information
  • Prices convey information vs.
  • Prices convey information City Average House Price 12 Month Change Vancouver, BC $792,000 + 19.4 % Toronto, Ont $454,000 + 5.3 % Calgary, Alb $401,000 + 2.3 % Ottawa, Ont $338,000 + 5.9 % Montreal, Que $300,000 + 4.6 % Regina, Sask $273,000 + 3.4 % Halifax, NS $262,000 + 4.2 % Fredericton, NB $153,000 + 2.5 % Canadian Cities Average House Prices: February 2011
  •  
  • Mark Carney: housing is “severely unaffordable” in some cities. WHY?
  • Key principles of Economics: 4. Trade makes people better off 5. Prices convey information 6. Market economy is efficient
  • Market efficiency Market economy vs. Command (Planned) economy
  • Market efficiency
  • What Canadian city is this?
  • Great Depression was also market failure
  • Pollution is yet another example of market failure
  • What is wrong with this picture?
  • Normative vs. Positive statements
    • Jane earns more than me.
    • I should be earning as much as Jane.
    • The economy is booming now.
    • We must pull our economy out of recession
  • Economists use models to explain the world Part III: Economic models
  • Our first model: The Circular-Flow Diagram Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production labour, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services
  • Model #2: The Production Possibility Frontier (PPF) Combination D is attainable but inefficient (some resources are unemployed) Combination C is unattainable Combinations F, A, B, E are attainable and (equally) efficient (there is no unemployment)
  • Example: technological improvement in computer production
  • Is Productive Capacity Growing? Point d was initially unattainable. But after sufficient growth, it becomes attainable. Growth in productive capacity is shown by an outward shift of the production possibility boundary. • a • b Quantity of Military Goods Quantity of Civilian Goods Production possibility boundary before growth • d Production possibility boundary after growth
  • Model #3: Standard model of a trading economy
  • 1. What bundle to produce?
    • Introducing prices
    • Value of output (V):
    V = PCQC + PF QF where P C = price of cloth P F = price of food Q C = quantity of cloth Q F = quantity of food
  • Relative Prices Determine the Economy’s Output
  • How an Increase in the Relative Price of Cloth Affects Production
  • 2. Introducing Preferences: What Consumers Want Quantity of Cloth Quantity of Food Indifference curve (IC) : shows consumption bundles that give consumers the same level of satisfaction One of consumers’ indifference curves I 1 B A
  • Four Properties of Indifference Curves Quantity of Cloth Quantity of Food A few of consumers’ indifference curves 2. Higher indifference curves are preferred to lower ones. 1. Indifference curves are downward-sloping. 3. Indifference curves cannot cross. 4. Indifference curves are bowed inward. I 1 I 2 I 0 D C A B
  • The Marginal Rate of Substitution Consumers’ MRS is the amount of food they would substitute for another meter of cloth. I 1 1 1 6 2 Marginal rate of substitution (MRS) : the rate at which consumers are willing to trade one good for another. - MRS = slope of indifference curve MRS = MRS = MRS falls as you move down along an indifference curve. Quantity of Cloth Quantity of Food A B
  • 3. Putting it all together Quantity of Cloth Quantity of Food Closed economy: Isovalue line PPF I 1 I 2 I 0 F C A B
  • 3. Putting it all together Open economy:
  • Rise in the Relative Price of Cloth
  • Self-check! You should know: 1. The 3 big questions of Economics; 2. Key principles of Economics; 3. Normative and positive statements; 4. Circular flow model; 5. PPF, how and why it shifts; 6. Standard trade model in detail
  •