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Class 13 March 1 Last class: Review of economic concepts and methods Today:

Class 13 March 1 Last class: Review of economic concepts and methods Today: Results of Quiz 3 and problem set 1 2. Review of economic concepts and methods 3. International trade theory Next class: 3. International trade theory Quiz 4 (section 2.7 only) Reading:

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Class 13 March 1 Last class: Review of economic concepts and methods Today:

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  1. Class 13 • March 1 • Last class: • Review of economic concepts and methods • Today: • Results of Quiz 3 and problem set 1 • 2. Review of economic concepts and methods • 3. International trade theory • Next class: • 3. International trade theory • Quiz 4 (section 2.7 only) • Reading: • 2. Review of economic concepts

  2. Class 13 • March 1 • Important date:

  3. Result of Quiz 3 N = 39 Range = 3 – 10 Average = 8.95

  4. Result of Problem Set 1 N = 36 Range = 39 – 98 Average = 81.2

  5. 2. Review of economic concepts 2.1. An overview of an economy -- How does it work? 2.2. Demand and supply 2.3. Market equilibrium and price determination 2.4. Excess supply and excess demand 2.5. Consumer and producer surplus 2.6. Impacts of market interventions 2.7. International trade & price determination

  6. 2.7. International trade & price determination 2.7.0. Two markets with no trade (handout) -- Equilibrium in each market -- CS and PS in each market 2.7.1. Free trade with zero transportation cost (handout) -- An intuitive analysis -- A graphic analysis -- Exporting country: Supply & demand ==> excess supply (ES) -- Importing country: Supply and demand Supply & demand ==> excess demand (ED) -- International market: ES = ED ==> trade price and quantity -- Effects of trade

  7. 2.7. International trade & price determination 2.7.1. Free trade and zero transportation cost -- A mathematical analysis (see handout) -- Export country  excess supply -- Import country  excess demand -- Trade: ES = ED -- Effects of trade -- Exporting country Change in Qs, Qd, P, CS, PS, and (CS+PS) -- Importing country Change in Qs, Qd, P, CS, PS, and (CS+PS)

  8. Effects of trade between two nations (compared to the situation of no trade) Exporting country Importing country Domestic production:   Domestic consumption:   Market price:   CS   PS   Total welfare (CS+PS):  

  9. 2.7. International trade & price determination 2.7.2. Free trade with transportation cost (handout) -- A graphic analysis -- Exporting country: Supply & demand ==> excess supply (ES) -- Importing country: Supply and demand Supply & demand ==> excess demand (ED) -- International market: Import price = export price + transport cost ES = ED ==> trade prices and quantity -- A mathematical analysis (see handout)

  10. 2.7. International trade & price determination 2.7.3. Trade with an import tax: The impacts of an import tax is the same as the impacts of transportation cost except that the importing country will collect tax revenue

  11. Effects of an import tax (compared to the situation of free trade) Exporting country Importing country Domestic production: Domestic consumption: Market price: CS PS Total welfare:

  12. 3. International trade theory 3.1. Simple examples: two-person cases 3.2. Absolute and comparative advantages 3.3. Trade between two countries 3.4. The sources of comparative advantage 3.5. Other explanations for international trade 3.6. Measurement of the gains from trade 3.7. Exchange rate and its determination

  13. 3.1. Simple examples -- two-person cases Example 1: Suppose Kevin and Mark have just completed the data collection and analysis for a group project and are ready to write the project report that will include 18 pages of text and 10 graphs. Here are the estimated rates for both Kevin and Mark: Kevin Mark Text 2 pages/hr. 3 pages/hr. Graphs 2 graphs/hr. 1 graph/hr. 50/50 share with no specialization: Kevin: 9 pages of text and 5 graphs ==> 7 hrs Mark: 9 pages of text and 5 graphs ==> 8 hrs

  14. 3.1. Simple examples -- two-person cases With specialization: For example: Kevin: 8 graphs & 2 pages of text ==> 5 hrs Mark: 2 graphs & 16 pages of text ==> 7.3 hrs OR Kevin: 10 graphs and no text ==> 5 hrs Mark: 18 page of text and no graph ==> 6 hrs In this case, Kevin is more productive in graphs and Mark is more productive in text. When each person is more productive in one production, trade and specialization can benefit both of them.

  15. 3.1. Simple examples -- two-person cases Example 2: Suppose Ashley and Helen are another group for the same project (18 pages of text and 10 graphs) with the following estimated rates: Ashley Helen Text 2 pages/hr. 3 pages/hr. Graphs 1 graph/hr. 2 graphs/hr. 50/50 share with no specialization: Ashley: 9 pages of text & 5 graphs ==> 9.5 hrs Helen: 9 pages of text & 5 graphs ==> 5.5 hrs Helen is more productive in both text & graphs but Ashley is less productive in both text & graphs. Can specialization benefit both of them?

  16. 3.1. Simple examples -- two-person cases With specialization: Ashley: 14 pages of text & 2 graphs ==> 9 hrs Helen: 4 pages of text & 8 graphs ==> 5.33 hrs OR Ashley: 18 pages of text & no graph ==> 9 hrs Helen: 10 graphs and no text ==> 5 hrs Ashley is less productive in both text and graphs but is RELATIVELY more productive in preparing text (Helen is more productive in text & graphs and RELATIVELY more productive in graphs).

  17. 3.1. Simple examples -- two-person cases What can we conclude from the first two examples: (1) When each person is more productive in one activity, specialization and trade can benefit both of them (2) When each person is RELATIVELY more productive in one activity, specialization and trade can benefit both of them. What can we conclude from the third example (David and John) on the next page?

  18. 3.1. Simple examples -- two-person cases Example 3: David John Text 6 pages/hr. 3 pages/hr. Graphs 4 graphs/hr. 2 graphs/hr. 50/50 share with no specialization: David: 9 pages of text & 5 graphs ==> 2.75 hrs John: 9 pages of text & 5 graphs ==> 5.5 hrs David is more productive in both text & graphs and John is less productive in both text & graphs. Is John RELATIVELY more productive in text or graphs? For this example, we can not find a specialization that can benefit both David and John.

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