Welcome to Econ 414 International Economics

1. 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)

2. 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 • 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

3. 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?

4. 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.

5. 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

6. Example: US PPF for shoes and cars • Slope = 20 = opportunity cost of one car = marginal rate of transformation • This PPF is linear, meaning that the opportunity cost of one car is always 20 pairs of shoes shoes 1000 PPF cars 50

7. Example • In the absence of trade, a nation can choose any point on this curve. • Suppose the nation picks to produce and consume at point A shoes 1000 A PPF 600 cars 20 50

8. 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.

9. 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.

10. 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) • 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) shoes 1000 *B A PPF 600 *C cars 20 50

11. 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