Lecture 4 The PPF Comparative Advantage and International

Lecture 4 The PPF, Comparative Advantage and International Trade Dr. Jennifer P. Wissink © 2020 Jennifer P. Wissink, all rights reserved. February 3, 2020

Announcements-Micro Spring 2020 u Prelim 1 – Please look to see if you have evening prelim conflicts for prelim 1 and sign up for either Option 1 or Option 2 (see syllabus) ASAP. The links on Canvas work now. I need to figure out how big a room I need. Thanks. – If you are eligible for extended time/distraction free prelim accommodations, please get your letter to me ASAP. Again, I need to know how big a room I need to reserve. u Last Day to Add courses easily (w/o petition or late fees) is TOMORROW. So please see me at my office (468 Uris) today or tomorrow to get my “red” stamp on a paper drop/add for (I have some in my office) if you need it. – If you absolutely HAVE to switch you section, let’s get that done too (see above). u MEL Quiz#02 and Quiz#03 extensions – Quiz#02 is now due Friday 2/7/2020 at 11 pm – Quiz#03 is noe due Friday 2/14/2020 at 11 pm u Prelim 2 – Passover: Please plan to take the makeup (Option 2) on Friday April 10. Just sign up like the people who have evening prelim conflicts. – Good Friday: Please plan to take the prelim on Thursday evening or use the early sitting test (Option 1). Just sign up like the people who have evening prelim conflicts. – Please let me know if I missed any others… thanks!

The PPF: Seeing Marginal Opportunity Cost u The │slope │ of the PPF measures the marginal opportunity cost of producing an incremental unit of the horizontal good (guns) in terms of the vertical good (butter).

So Why The Bowed-Out PPF Curve? Why Increasing MOC? u Two-fold answer: – (1) Heterogeneous factors of production – Some factors are better suited for one thing as compared to the other. – (2) The “Law of Diminishing Marginal Returns” (LDMR): – As you add more and more of a variable factor to some activity, in the presence of a fixed factor, the marginal contribution of the variable factor will eventually decline.

Checking For The LDMR In Guns & Butter GUNS K L Guns 2 0 0 2 1 1 2 2 3 3 2 4 4 2 5 5 MPLG BUTTER K L Butter 1 0 0 1 1 2 30 1 3 37 1 4 39 1 5 40 production function for Guns MPLB production function for Butter MPLB

i. Clicker question Which one of the following statements about the production possibility frontier (PPF) shown is false? A. Points A-E on the PPF represent efficient combinations of clean water and energy. B. The PPF is bowed out because in order to increase energy production we must give up less and less clean water. C. The point F is inefficient because more of both outputs is possible. D. The point G is not feasible because there are not enough resources in the economy to reach G. E. The marginal opportunity cost of energy increases as the economy increases energy production.

i. Clicker question MEL Quiz#02 -Q 7: A society can produce two goods: donuts and beer. The society's production possibility frontier is negatively sloped and "bowed outward" from the origin. As this society moves up its production possibility frontier, producing more and more units of donuts, the opportunity cost of producing beer: A. increases. B. could decrease or increase depending on the technology. C. decreases. D. remains constant.

The LDMR & “The Dismal Science” u u u Thomas Malthus & David Ricardo English 19 th century economists Worried about fixed supply of land, LDMR, increasing population and their inability to feed themselves. – Why Economics Is Really Called the “Dismal Science”? See Thomas Carlyle. – https: //www. theatlantic. com/business/archiv e/2013/12/why-economics-is-really-calledthe-dismal-science/282454/ u Where did they go wrong?

Location of the PPF & PPF Gymnastics u B PPF-old Suppose we have growth via… – new technology, science, innovation R&D – increases in labor productivity – increases in kapital productivity – investments in human and economic kapital – newly found/acquired resources PPF-new G u What happens to the PPF?

i. Clicker question Suppose Country Alpha is efficiently making both Guns and Butter. Suppose there is a technological innovation in the butter sector. Which one of the following is true? A. The economy can make more guns, but not more butter as compared to before. B. The economy can make more butter, but not more guns as compared to before. C. The economy is inside its PPF and will move to a point on its PPF. D. The economy can make more guns and more butter as compared to before. E. The economy has to make more guns and more butter as compared to before. B PPF-new PPFold G

The PPF & MOC Applied to International Trade u u u Very nice application of PPF. Nice way to introduce the ideas of absolute advantage and comparative advantage. David Ricardo, again. – Some consider him the grandfather of international trade theory. – Very influential in pioneering theory of comparative advantage, inter alia. – Very interesting, very bright guy. – Had a lot of say about the “corn laws” in England…, and more.

The Idea Of Comparative Advantage & Trade u u u Specialization and free trade will benefit all trading parties, even when some are “absolutely” more efficient producers than others. Need to understand absolute vs. comparative advantage. Paul Samuelson on CA, “…the best example he knows of an economic principle that is undeniably true yet not obvious to intelligent people. ” – Paul A. Samuelson, Economist, Dies at 94 (NYTimes obit): – http: //www. nytimes. com/2009/12/14/business/economy/14 samuel son. html

Absolute vs. Comparative Advantage u u u Absolute advantage: if your country uses fewer resources to produce a given unit of output than the other country. Comparative advantage: if your country can produce an output at a lower marginal cost in terms of other goods foregone than the other country. Every country (or person, or economy) has a comparative advantage at some activity. Absolute advantage is not the crux of the argument…and may not always happen. Sometimes people or countries have the absolute advantage in nothing! Yet trade possibilities still exist. It’s all about comparative advantage.

Team Work, AA and CA u Find a partner u Each of you get out a piece of paper or create a blank page on your tablet.

Task #1 u Everyone do the following… put as many of the following names as you can in alphabetical order in 60 seconds. Springsteen, Bruce Carmel, Adi Federer, Roger Farkash, Emma Chang, Alexander Victor, Tan Barrie, Oummu Zomback, Anna Kang, Madison Wissink, Cassius Kroeller, Ulrike Smith, Adam Keel, Aine Zhou, Jesse Abbott, Geroge Lanci, Sal Mc. Guire, Cooper Mc. Cabe, Sean Mac. Farland, Eddie Tapia, Lucas Victor, Kim Chang, Megan Wood-Thomas, Ethan Gee, Olivia Wang, Yifei

Abbott, Geroge Barrie, Oummu Carmel, Adi Chang, Alexander u Count how many names in a row you got right. Chang, Megan and stop counting as soon as you’re wrong. Farkash, Emma Federer, Roger u Complete the following sentences. Gee, Olivia Kang, Madison – In 60 seconds I correctly ordered ______ names. Keel, Aine Kroeller, Ulrike Lanci, Sal Mac. Farland, Eddie – It took me ______seconds to order each name. Mc. Cabe, Sean Mc. Guire, Cooper Smith, Adam Springsteen, Bruce i. Clicker question: As Tapia, Lucas compared to your partner, Victor, Kim did you have the absolute Victor, Tan advantage in alphabetizing? Wang, Yifei Wissink, Cassius A. Yes Wood-Thomas, B. No Ethan C. We were the same Zhou, Jesse Zomback, Anna Task #1

Task #2 u Everyone do the following… on your paper write, with nice script/cursive writing, the following note as many times as you can in 60 seconds. u Dear valued supporter, thank you so much for your generous contribution to my Senate campaign.

Task #2 u u Count how many notes you were able to complete. Complete the following sentences. – In 60 seconds I wrote _____ notes. – It took me ______seconds to write each note. i. Clicker question: As compared to my partner, I had the absolute advantage in this task too! I rock!! A. Yes B. No C. We were the same

Task Trade Offs u It took me ______seconds to order each name. It took me ______seconds to write each note. Complete the following sentences. – My marginal opportunity cost for writing a note was _______ names. – My partner’s marginal opportunity cost for writing a note was _______ names. i. Clicker question: As compared to my partner, A. I have the comparative advantage in writing notes. B. I do not have the comparative advantage in writing notes. C. We both had the exact same marginal opportunity cost of writing notes.

Task Trade Offs u It took me ______seconds to order each name. It took me ______seconds to write each note. Complete the following sentences. – My marginal opportunity cost for ordering names was _______ notes. – My partner’s marginal opportunity cost for ordering names was _______ notes.

There is (Almost) Always Trade Possibilities i. Clicker question: Compared to my partner… A. I have the comparative advantage in writing notes and the comparative advantage in ordering names. B. I have the comparative advantage in writing notes and my partner has the comparative advantage in ordering names. C. My partner has the comparative advantage in writing notes and the comparative advantage in ordering names. D. My partner has the comparative advantage in writing notes and I have the comparative advantage in ordering names. E. None of the above.

Each Country’s PPF u u u Assume L=80 hours in England. Assume L=80 hours in Portugal. Labor is mobile within the country but can’t go from one country to the other. England’s PPF LABOR HRS REQUIRED ENGLAND PORTUGAL 1 yd. cloth 2 hours 1 hour 1 barrel wine 40 hours 10 hours Portugal’s PPF