Welcome to Econ 414
International Economics
Study Guide
Week Two
Ending Sunday, September 9
(Note: You must go over these slides and complete
every task outlined here before the end of the day on
September 8)
Chapter 2: Make sure you understand the
following topics and can answer the related
questions. If not, ask me your questions
• What are the similarities and the differences
between international and interregional trade?
• Make sure you understand Figure 2.1 and the
discussion that goes along with it
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–
–
–
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What are the main points of this discussion?
Why do the two nations trade?
How does the trade affect the price in each country?
Is everyone better off?
What is the effect of trade
• Mercantilism (1700s)
– Why did they stress exports over imports?
– What does it mean when they say trade is a zero sum activity?
• Adam Smith (1723 (Scotland)-1790)
– What did he mean when he said that trade was not a zero sum
activity?
– What does absolute advantage mean?
• David Ricardo (1772(Netherlands)-1823)
– What was his major contribution?
– How is comparative advantage different from absolute
advantage?
– Can a nation have comparative advantage but absolute
disadvantage in production of good “A”? If so, how? If not, why
not?
What is Absolute Advantage
• A nation has an absolute advantage in
production of widgets over its trade partner if
– it can produce one widget using fewer resources than
its trade partner; or
– using all of its resources it can produce more widgets
than its trade partner
– Example
• if US uses 20 hours of labor to produce a car and Japan uses
18 hours of labor to produce a car, then Japan has absolute
advantage in production of car over US
• If in one day US uses all of its resources to produce just cars,
it can produce 100 cars. If in one day Japan uses all of its
resources to produce just cars, it can produce 150 cars.
Again Japan has absolute advantage.
Production Possibilities Frontier
(PPF)
• A curve that shows the different
combinations of two goods that a nation
can produce efficiently, with a given
amount of resources and a given
technology in a given period of time
Example: US PPF for shoes and
cars
• Slope = 20 = opportunity
cost of one car = marginal
rate of transformation
shoes
1000
PPF
50
• This PPF is linear, meaning
that the opportunity cost of
one car is always 20 pairs of
shoes
cars
Example
• In the absence of trade, a
nation can choose any point
on this curve.
shoes
• Suppose the nation picks
to produce and consume at
point A
1000
600
A
20
PPF
50
cars
Comparative Advantage
• A nation has a comparative advantage in
production of a good if it can produce that good
at a lower opportunity cost compared to its trade
partner
• Example
– In our example, the opportunity cost of one car in the
US is 20 pairs of shoes.
– If the opportunity cost of one car in Spain is 40 pairs
of shoes, then the US has a comparative advantage
in production of cars over Spain.
Definition
• A nation is better off as a result of trade if it
consumes no less of any goods and more
of at least one good after trade.
Example
• If as a result of trade, we
can have at least 20 cars but
more than 600 pairs of
shoes we will be better off.
(point B or to the right of it)
shoes
1000
600
*B
A
20
PPF
*C
50
• Or if as a result of trade,
we can have at least 600
shoes but more than 20 cars
then we will be better off.
(point C or to the left of it)
cars
Assignment 1
• Is posted on the homepage of WebCT
• It is due on or before Thursday, September 6
at noon
• To complete this assignment you need to
work in groups of 2 or 3. One of you will be
the representative of Germany and one or
two of you will be representing the United
States.
• Send your assignments to me as an email
attachment to khorassj@marietta.edu