International Economics Introduction to International Economics
Plan of the Topic 1: Part I: Basics of International Economics Part II: Three economic models <ul><ul><ul><li>Circular Flo...
PPF
Standard  Trade Model </li></ul></ul></ul>
Part I: Basics of International Economics
Scarcity
Do rich people face scarcity?
Do poor people face scarcity?
<ul><ul><li>What  to produce
How  to produce
For whom  – who will benefit from it </li></ul></ul>THREE Big Questions : WHAT, HOW AND FOR WHOM
1. People face  trade-offs   Key  principles  of  Economics:
Tradeoffs OR
 
<ul><li>A country is said to have an  absolute advantage  in a product over another country, if it can produce it with les...
Application: Absolute Advantage TABLE 1 Production by 1 worker (L) per day Cloth Wine England 5 rolls 10 barrels Portugal ...
TABLE 2 Effect of reallocating 1 worker (L) in each country Cloth Wine England +1 L  -> +5 rolls - 1 L  -> - 10 barrels Po...
In our example: <ul><li>What trade-off does Portugal face?
What trade-off does England face? </li></ul>Application: Absolute Advantage
Key  principles  of  Economics: 1. People face  trade-offs   2. The  opportunity cost  of something is what you have to gi...
What is wrong with this picture?
<ul><li>A country has a  comparative advantage  in a product if it can produce that product at a  lower opportunity cost  ...
Application: Comparative Advantage TABLE 3 Production by 1 worker per year Opportunity Cost Auto parts units of Software 1...
Application: Comparative Advantage TABLE 4 Effect of reallocating 1 worker (L) in Canada and 3 workers (L) in Mexico Auto ...
Application: Comparative Advantage TABLE 4 Effect of reallocating 1 worker (L) in Canada and 3 workers (L) in Mexico Auto ...
Application: Comparative Advantage TABLE 5 Effect of reallocating 1 unit of labour in Canada  and  1  unit of labour in Me...
Key  principles  of  Economics: 1. People face  trade-offs   2. The  opportunity cost  of something is what you have to gi...
Questions <ul><li>Does trade make everyone better off? </li></ul><ul><li>What do you think of “Protect domestic producer!”...
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  ...
 
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 e...
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 <ul><li>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 </li></ul>
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 ...
Model #2: The Production Possibility Frontier (PPF) Combination D is attainable but inefficient (some resources are unempl...
Example: technological improvement in computer production
Is Productive Capacity Growing? Point  d  was initially unattainable. But after sufficient growth, it becomes attainable. ...
Model #3:  Standard model of a trading economy
1. What bundle to produce? <ul><li>Introducing prices
Value of output (V): </li></ul>V  =  PCQC + PF QF where P C  = price of cloth P F  = price of food Q C  = quantity of clot...
Relative Prices Determine the Economy’s Output
Upcoming SlideShare
Loading in …5
×

Topic 1 -_intro_-_to_post

738 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
738
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
12
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 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 &amp; 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

    1. 1. International Economics Introduction to International Economics
    2. 2. Plan of the Topic 1: Part I: Basics of International Economics Part II: Three economic models <ul><ul><ul><li>Circular Flow Diagram
    3. 3. PPF
    4. 4. Standard Trade Model </li></ul></ul></ul>
    5. 5. Part I: Basics of International Economics
    6. 6. Scarcity
    7. 7. Do rich people face scarcity?
    8. 8. Do poor people face scarcity?
    9. 9. <ul><ul><li>What to produce
    10. 10. How to produce
    11. 11. For whom – who will benefit from it </li></ul></ul>THREE Big Questions : WHAT, HOW AND FOR WHOM
    12. 12. 1. People face trade-offs Key principles of Economics:
    13. 13. Tradeoffs OR
    14. 15. <ul><li>A country is said to have an absolute advantage in a product over another country, if it can produce it with less labour. </li></ul>Application: Absolute Advantage
    15. 16. 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
    16. 17. 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
    17. 18. In our example: <ul><li>What trade-off does Portugal face?
    18. 19. What trade-off does England face? </li></ul>Application: Absolute Advantage
    19. 20. 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.
    20. 21. What is wrong with this picture?
    21. 22. <ul><li>A country has a comparative advantage in a product if it can produce that product at a lower opportunity cost than its trading partner. </li></ul>Application: Comparative Advantage
    22. 23. 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
    23. 24. 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
    24. 25. 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
    25. 26. 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
    26. 27. 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
    27. 28. Questions <ul><li>Does trade make everyone better off? </li></ul><ul><li>What do you think of “Protect domestic producer!” and “Buy Canadian!” slogans? </li></ul><ul><li>http://www.theonion.com/video/more-american-workers-outsourcing-own-jobs-oversea,14329/ </li></ul>
    28. 29. Key principles of Economics: 4. People respond to incentives 5. Prices convey information
    29. 30. Prices convey information vs.
    30. 31. 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
    31. 33. Mark Carney: housing is “severely unaffordable” in some cities. WHY?
    32. 34. Key principles of Economics: 4. Trade makes people better off 5. Prices convey information 6. Market economy is efficient
    33. 35. Market efficiency Market economy vs. Command (Planned) economy
    34. 36. Market efficiency
    35. 37. What Canadian city is this?
    36. 38. Great Depression was also market failure
    37. 39. Pollution is yet another example of market failure
    38. 40. What is wrong with this picture?
    39. 41. Normative vs. Positive statements <ul><li>Jane earns more than me.
    40. 42. I should be earning as much as Jane.
    41. 43. The economy is booming now.
    42. 44. We must pull our economy out of recession </li></ul>
    43. 45. Economists use models to explain the world Part III: Economic models
    44. 46. 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
    45. 47. 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)
    46. 48. Example: technological improvement in computer production
    47. 49. 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
    48. 50. Model #3: Standard model of a trading economy
    49. 51. 1. What bundle to produce? <ul><li>Introducing prices
    50. 52. Value of output (V): </li></ul>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
    51. 53. Relative Prices Determine the Economy’s Output
    52. 54. How an Increase in the Relative Price of Cloth Affects Production
    53. 55. 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
    54. 56. 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
    55. 57. 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
    56. 58. 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
    57. 59. 3. Putting it all together Open economy:
    58. 60. Rise in the Relative Price of Cloth
    59. 61. 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

    ×