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TRADE, TRADE-OFFS, AND GOVERNMENT POLICY

TRADE, TRADE-OFFS, AND GOVERNMENT POLICY. Chapter 2. The Production Possibilities Model. A production possibilities curve illustrates opportunity cost by showing trade-offs among choices we make. Q Flowers. Slope = F/T= –2/1= –2.

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TRADE, TRADE-OFFS, AND GOVERNMENT POLICY

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  1. TRADE, TRADE-OFFS,AND GOVERNMENT POLICY Chapter 2

  2. The Production Possibilities Model • A production possibilities curve illustrates opportunity cost by showing trade-offs among choices we make.

  3. QFlowers Slope = F/T= –2/1= –2 Slope = –2 is O.C. of 1 more T(in terms of forgone F) A 12  PPF, PPC F i.e., O.C. of 1 more T is 2 F’s E What’s reciprocal of slope? C 6 F = –2 Reciprocal of slope = –1/2 is …?? D 4 Reciprocal of slope is O.C. of 1 more F(in terms of forgone T) T = +1 B  0 3 4 6 Q Tomatoes

  4. A Production Possibilities Curve for an Individual Hours of study Grade in Hours of study Grade in in history history in economics economics 20 hours of economics 0 hours of history 20 98 0 40 A 100 19 96 1 43 18 94 2 46 17 92 3 49 B 88 16 90 4 52 15 88 5 55 14 86 6 58 Economics grade 13 84 7 61 12 82 8 64 20 hours of history 0 hours of economics C 70 11 80 9 67 10 78 10 70 9 76 1 1 73 8 74 12 76 7 72 13 79 6 70 14 82 5 68 15 85 D 46 4 66 16 88 E 3 64 17 91 40 58 66 78 94 98 2 62 18 94 1 60 19 97 History grade 0 58 20 100

  5. 1 pound of butter 2 pounds of butter 5 pounds of butter 4 guns 3 guns 1 gun PPC for Society m of PPCAB m of PPCBC m of PPCEF A 15 B 14 C 12 |m|=1/4 D 9 Butter |m|=2/3 E 5 F 4 7 9 11 12 0 Guns |m|=5/1

  6. Increasing Marginal Opportunity Cost PPC SlopeA… A Flat, which means… Butter MCPROD 1 MORE GUN (in terms of butter given up) is small (low); why? B Guns PPC SlopeB…

  7. 10 8 C D 6 Guns B 4 A 2 0 2 4 6 8 10 Butter Efficiency and Inefficiency

  8. Shifts in the PPC • Society can produce more output if… • Technology is improved, • More resources are discovered. • Economic institutions get better at fulfilling our wants. • More output is represented by an outward shift in the PPC.

  9. Shifts in the PPC Neutral Technological Change Biased Technological Change Butter C Butter C B A 0 0 D B A Guns Guns

  10. Production Efficiency vs. Distribution • PPC focuses on productive efficiency … • Ignores who gets what (i.e., “distribution”)

  11. $6,000 $5,000 $4,000 Per capita income (in 1990 international dollars) $3,000 $2,000 $1,000 0 500 1000 1500 2010 Growth in the Past Two Millennia 200 Countries, 200 Years, Hans Rosling

  12. Per Capita Income by Country

  13. Per Capita Income (con’t)

  14. Gains from Trade • Example: • Pakistan: comparative advantage in fabric • Belgium: comparative advantage in chocolate. • Pakistan can produce either • 4,000 yards of fabric, or • 1 ton chocolate, or any proportional combination of two. • Belgium can produce either • 1,000 yards of fabric, or • 4 tons chocolate, or any proportional combination of two

  15. Gains from Trade (A+B): 2½C, 2½T (H): 4C, 4T  F 4 3 Pakistan Textiles (in thousands of yards) C A 2 Consumption Possibilities(w/ Trade!) 1 B Belgium  G 1 2 3 4 Chocolate(tons)

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