3 - Benefits of Trade - Ch. 3

ucla | ECON 1 | 2022-09-28T20:05

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Table of Contents

• Recall
• Notes
• Tools
• Lecture

Recall

1. Comparative advantage
   1. producers are incentivized to specialize in production and trade for other goods
   2. producers then have an advantage or disadvantage in opportunity cost to produce a good as another producer
2. Terms of Trade
   1. producers will decide on a exchange rate based on a lower than current opportunity cost of production

Notes

Supplemental Definitions

• comparative advantage
  • ability to produce a good at lower OC than another producer
• absolute advantage
  • ability to produce a good at lower absolute input cost than another producer
• terms of trade
  • rate at which producers should trade goods to achieve lower opportunity costs

Big Ideas

• trade can make everyone better off
  • look at comparative advantage from PPF
• markets link societies
  • Kenyan roses → Holland flower markets → florists → consumers
  • all in ~72 hours
• linked markets
  • e.g. oil and candy bar markets in Brazil
    • Brazil is the largest producer of sugar cane
    • oil price rose → Brazil shifted sugar cane intro ethanol production (in place of sugar production) → table sugar price rose → fuel costs stabilized → Brazil reduces gasoline consumption by 40%
  • e.g. housing boom and milk prices
    • end of the housing boom in 2007
    • reduced housing construction reduced lumber demand → less sawdust (used in bedding for cows) → higher sawdust prices → higher milk prices
• trade benefits (PPF)
  • e.g. cattle rancher and potato farmer; labor hours to make meat and potatoes
    • production = consumption
      • farmer
        • meat: 60 min per oz
        • potatoes: 15 min per oz
      • rancher
        • meat: 20 min per oz
        • potatoes: 10 min per oz
    • rancher has absolute advantage
      • farmer in 8 hours
        • meat: 8 oz
        • potatoes: 32 oz
      • rancher in 8 hours
        • meat: 24 oz
        • potatoes: 48 oz
    • opportunity cost
      • farmer
        • 8 meat / 32 potatoes
        • 1/4 (meat/potatoes)
      • rancher
        • 24 meat / 48 potatoes
        • 1/2 (meat/potatoes)
      • the farmer and rancher are inverse cost-producers per good

      • trade

        • find opportunity costs then decide on terms of trade

Tools

https://youtu.be/kc3f7nXJSRQ

Lecture

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**SUMMARY
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