Bài giảng Microeconomics - Chapter 3 Comparative Advantage: The Basis for Trade

Comparative Advantage:The Basis for Trade0What is Chapter 3 about?1I. Introduction to Comparative AdvantageSlide 3 - 22Generalize or Specialize?GeneralistsPeople who do all (or most) of their own tasks“Jack-of-all-trades” Problem: “Master of none”Self-sufficiency is the advantageLow productivity is the disadvantageSpecialistsFocus on fewer tasks & trade to satisfy wantsEach person is more productive – hence greater total output3Comparative AdvantageRelative costs are the key idea in comparative advantageExample: Farmer Clem has fertile soil, yields 3 tons potatoes or 1 ton carrots per hectareDan has rocky soil, could produce 2 tons potatoes or 0.5 ton carrots per hectare4Specialization or self sufficiency ?What is the opportunity cost of producing one ton of carrots ?Clem has to give up 3 tons potatoesDan has to forgo 4 tons potatoes has to switch 2 Hectares’ productionClem has lower relative costs of carrot production – his comparative advantage is in carrotsDan should avoid carrots – will get most income if specializes in potatoes(but still lower than Clem)5Absolute vs. Comparative AdvantageA person has an absolute advantage in a task over someone else ifThat person takes fewer hours to perform a task than the other personA person has a comparative advantage in a task over another ifThat person’s own opportunity cost of performing the task is lower than the other person’s opportunity cost6Principle of Comparative AdvantageWhen each producer concentrates on the activities for which opportunity cost is lowest, aggregate output is maximizedThis holds even when one has absolute advantage over others at everything. Specialization where there is comparative advantage is still the best route!When we all focus where we are relatively more productive, together we can produce vastly more than if we insisted on self-sufficiency.7Table 3.3The Gains When Rikke and Beth Specialize8Sources of Comparative AdvantageFor individualsInborn talent plays a role – but only to startOver time - talent is developed by education, training, and experienceFor countriesDifference in natural resources, topography, climateDifference in cultures & social institutions Dynamic comparative advantage – “learning by doing” develops industry specific expertise“Infant Industry” argument for tariffs & subsidies9II. Production Possibilities in a One-Person EconomySlide 3 - 1010The Production Possibilities CurveA graph that describes the maximum amount of one good than can be produced for every possible level of production of the other goodFor example, picking coffee beans or picking Macadamia nuts. The more time spent doing one, the less time there is available for the other11Fig. 3.1Susan’s Production Possibilities12 Attainable Versus Unattainable PointsAttainable pointAny combination of goods that can be produced using currently available resourcesUnattainable pointAny combination of goods that cannot be produced using currently available resources13Efficient and InefficientEfficient pointAny combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the otherInefficient pointAny combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other14Fig. 3.2Attainable, Unattainable and Efficient Points on Susan’s PPCAttainable, efficient pointsAn unattainable pointAn attainable, but inefficient, point15Calculating Opportunity CostSusan’s opportunity cost of picking nuts:OCnuts = loss in coffee/gain in nutsSusan’s opportunity cost picking coffee beans:OCcoffee= loss in nuts/gain in coffeeThe PPC shows the scarcity principleMore of one means less of another16Fig. 3.3Tom’s Production Possibilities Curve17Changes in PPCProductivityIncreases in productivity shift the PPC out18III. Production Possibilities in a Multiple-Person EconomySlide 3 - 1919Fig. 3.4Individual Production Possibilities Curves Compared20Fig. 3.5PPC for a Two-Person Economy21Fig. 3.6Optimal Assignment of Production Tasks in a Two-Person Economy22Principle of Increasing Opportunity CostIn expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs - sometimes called - “The Low Hanging-Fruit Principle”23Fig. 3.7An Especially Useful Division of Labor24Gains from Specialization (a)Specialization produces gains for all, even when one person enjoys an absolute advantage in both tasksSpecializationUses differences in individual skillsDeepens skills via practiceOriginal example: Adam Smith & the Pin FactoryBreaks tasks into simple steps, multiplying the productivity of workers25Gains from Specialization (b)This is the most important explanation of the difference in income levels across societies26Limits to SpecializationWhat is the marginal benefit & marginal cost of more specialization ?Job satisfaction: Most people enjoy variety in the work they doIncreased specialization means less variety Overspecialization results in repetitive tasksTransactions costs may limit benefits of tradeHassle to hire someone else (e.g. to fix plumbing)Specialization leads to greater dependence on others to satisfy our needs27Fig. 3.8Production Possibilities Curve for a Large Economy28Smoothly Bowed PPCSmooth because of a large populationDownward-slopingShows scarcity principleIncreasing Opportunity CostGreater production of one good results in rising opportunity cost of producing more of that good29IV. Comparative Advantage and International Trade: SummarySlide 3 - 3030Comparative Advantage and International TradeEach trading partner can benefit from trade, even if one partner is absolutely more productiveWithout trade, the opportunity cost of producing is higher than it would be if trade occurred, hence output is lower31Fig. 3.10Production Possibilities Curve for a Small Island Nation32Fig. 3.11How Trade Expands the Menu of OpportunitiesABDE112966456165664112With tradeWithout trade33Fig. 3.12Gains from International Trade34Trade and the Small NationEach trading partner can benefit from trade, but the smaller partner’s gain is of greater consequence to them than the gain is to the larger partnerThe larger partner may demand implicit conditions for trade to take placee.g. Canada’s softwood lumber exports to the USADo $ gains from trade compensate for loss of autonomy ? – No universal answer 35Volume of TradeThe volume of international trade has grown substantially over timeMost nations produce a small fraction of the total supply of any good or servicePotential gain from trade is the differences in domestic opportunity costs and global opportunity costs36Why Trade Barriers (a)?If exchange is beneficial, why oppose it?International trade does increase the total $ value of all goods and services, but no guarantee that everyone will benefitE.G. NAFTA. Even if Canadian consumers generally benefit from lower prices, are job – losers compensated for their losses ?Dynamic Comparative Advantage:Will Canadians be forever “Hewers of wood and drawers of water” ? How can hi-tech industries reach the critical mass for survival ?37Why Trade Barriers (b)?Other concerns:A superpower may use trade as an instrument of foreign policy (e.g. US policy to Cuba)If there is lots of foreign ownership, the benefits may mostly flow to foreigners, rather than to the domestic populationTrade may lock existing comparative advantages into place, not allowing improvements in this area.38End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 1 - 3939What is Chapter 3 about?40I. Introduction to Comparative Advantage41II. Production Possibilities in a One-Person Economy42III. Production Possibilities in a Multiple-Person Economy43IV. Comparative Advantage and International Trade: Summary44Summary of Chapter 345