Chapter+3+Hanna+K

 





 Do we have a LOSER or a WINNER in trade?
 Have you ever bought a product from a different country? If you did, this is possible because your country has FREE TRADE. Trade refers to an act of two countries exchanging its product. Contrary to what many believe, trade benefits EVERYONE. There is no loser or winner when free trade is advocated. In this chapter, we will PROVE how that improbable outcome is indeed possible and EXPLORE some essential concepts of trade.

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 =WHO IS ADVANTAGEOUS OVER THE OTHER? =  Well, it depends on what kind of advantage you’re talking about. In economics, we have two types of advantage we deal with: comparative advantage and absolute advantage.

Absolute advantage is the ability to produce a good using fewer inputs than another producer. For example, if you take 10 minutes to make one cookie while your friend takes 15 minutes, you have an ABSOLUTE ADVANTAGE in that produce. However, having an absolute advantage DOES NOT mean you always have the comparative advantage.

Comparative Advantage is the ability to produce a good at a lower opportunity cost. Let’s go back to the previous example of you and your friend. If you had give up making ten juices for making one cookies, while your friend only had to give up making five juices for making his one cookie, he will have a COMPARATIVE ADVANTAGE.

Trade is truly beneficial because you are able to produce a good by specialization. In this chapter we assume, a country specialize and trade whatever product they have a COMPARATIVE ADVANTAGE in.

=PROVING TRADE step by step =  While explaining the benefits of trade might appear to be an easy task, PROVING why trade is good for everyone takes several steps. We can PROVE the benefits of trade for both countries participating through models and charts. This is the ESSENCE of chapter three. An important assumption we make before going into the steps stated below is that this world is comprised of only two people who each only has the option to produce two products. Under this assumption, now go ahead and follow the step by step process.

=STEP 1) SET YOUR MODEL! =  The first step to proving trade is to draw charts of trade system. There are essentially three charts you need to draw.

The first chart in the illustration above shows us of how much time Kathy and Kristin each takes produce meats and potatoes. This is the easiest chart of the three for the information will be given in the problem. We will take the data from this first chart to produce our second chart of absolute advantage.

The second chart is reflective of the absolute advantage of the trading relationship. Given 8 hours, Kristin is able to produce 8 units of meat while Kathy can produce 24 units of meat. in this case, Kathy has a ABSOLUTE ADVANTAGE in making units of meat. Then what about potatoes? Kristin in 8 hours can make 32 potatoes while Kathy can produce 48. In this case, Kristin has an ABSOLUTE ADVANTAGE in making units of potatoes.

Now that we have absolute advantage, can we stop here and prove why trade is good? ABSOLUTELY NO! Remember, in order to prove trade we pay attention to COMPARATIVE ADVANTAGE. Therefore, the third chart naturally is reflective of the two player’s comparative advantage. In order to find out the comparative advantage, you simply need to divide. What do I mean by this? Well, Kristin during the 8 hours she was given could have either produced 8 meats or 32 potatoes. In other words, with the time she took making 1 meat, she could have produced 4 potatoes. Same works for the second potato column for Kristin. During the time Kristin took to make 1 potato, she could have made 1/4 of meat. This comparative advantage is what we commonly refer as "costs." And as you can see, comparative advantages of the two products are reciprocals for it's reflective of the opportunity cost each incurs upon the other. Once we use the same process to fill out Kathy's row, we can now move onto step 2.

STEP 2) SPECIALIZE
 The benefits of trade, as stated previously, comes by each players in the economy specializing in the product they have a comparative advantage in. Going back to step 2, we figured out that Kristin has a comparative advantage in potatoes because she "gave up less" to produce the 1 unit of potato. (Think comparative advantage as what you need to give up to make something. You want to give up less!) So she devotes all her time of 8 hours to produce 32 potatoes. Kathy also does the same thing. She produces 24 meat, the product she gave up less to produce it.

Specialization
<span style="font-family: Verdana,Geneva,sans-serif;"> Kathy: 24 oz meat, 0 oz potatoes Kristin: 0 oz meat, 32 oz potatoes

=<span style="font-family: Verdana,Geneva,sans-serif;">STEP 3) PROVING THE OPTIMUM NUMBER FOR TRADE = <span style="font-family: Verdana,Geneva,sans-serif;"> It's time to find out the number in which Kathy and Kristin will trade with each other. In order to this, we first take a look at units of meat. Kathy is giving up 2 potatoes to produce 1 meat. Therefore, in a trade least Kathy will accept is 2 potatoes. Kristin, on the hand, gives up 4 potatoes to produce 1 meat. So, she will only offer Kathy 4 potatoes.

Now, we know the max and min each player will accept, the mid-point will be three potatoes.

Least Kathy will accept- 2 potatoes Max Kristin will accept- 4 potatoes 3 potatoes-IDEAL, GOOD FOR BOTH

Let's do the same thing for costs of meats.

LEAST Kristin will get- ¼ meat MAX Kathy will give- ½ meat

1/3 meat- IDEAL RATIO

Notice again that the meat and potatoes are reciprocals of each other.

=<span style="font-family: Verdana,Geneva,sans-serif;">STEP 4) GIVE AN EXAMPLE OF TRADE = <span style="font-family: Verdana,Geneva,sans-serif;"> In order to prove the trade is better off, we need to give an example of a trade!

First, used the ratio we got in step three and set an imaginary number for trade.

Meat: potato 1:3 10: 30

Carry out the trade and find then find out what each player has left after trade

Kathy initially had 24 meats, but no having traded 10 meats with 30 potatoes, has 14 meats left and gained 10 potatoes.

Kristin initially had 32 potatoes, but gave up 30 for the exchange of 10 meats. Now, he has 2 potatoes and 10 meats.

If it wasn't for trade, Kathy in order to produce 14 meats and 10 potatoes with her own pace would have taken much longer without trade. Same is for Kristin.


 * THEREFORE, WE FINALLY CONCLUDE TRADE IS GOOD FOR KRISTIN AND KATHY.**

=<span style="font-family: Verdana,Geneva,sans-serif;">APPLICATION TO REAL LIFE: LOOK AT WHY CELEBRITIES WILL (SHOULD) NOT MOW THEIR OWN LAWN! = <span style="font-family: Verdana,Geneva,sans-serif;">

=<span style="font-family: Verdana,Geneva,sans-serif;">SING ALONG = <span style="font-family: Verdana,Geneva,sans-serif;">

TRADE IS A KEY CONCEPT IN THE ECON WORLD AND WHEN WE STUDY TRADE, WE LEARN SO MUCH

TRADE'S BENEFITS ARE BIG AND GOOD THEY HELP EVERYONE AFTER TRADE WORLD IS HAPPY AND READY FOR MORE EXCHANGES

TRADE SHOW US LOTS OF THINGS LIKE COMPARATIVE ADVANTAGE

COST AND BENEFIT AND WE ARE ALL HAPPY

<span style="font-family: Verdana,Geneva,sans-serif;"> 1. The principle of Comparative Advantage argues all of the following, EXCEPT: <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> 2. Suppose that Jill can type 10 pages per hour in the computer, while Jim can only type 8. Further suppose that Jill can review 5 articles per hour while Jim can only review 2. Based on this, we can say that: <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> 3. Which of the following is true regarding the principle of Absolute Advantage? <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> specialization allows producers to produce goods for which they have a lower opportunity cost. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> free trade tends to cause bankruptcies and high unemployment in the long run. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> free trade allows producers to specialize. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> as producers specialize, overall production increases, making everybody better off. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> Jim has a comparative advantage over Jill in reviewing articles. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> Jill has an absolute advantage over Jim in reviewing articles. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> Jim has an absolute advantage over Jill in typing. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> Jill has a comparative advantage over Jim in typing. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> Nations should specialize in producing those goods for which they have a lower opportunity cost. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> Nations should export goods for which they do not have an Absolute Advantage. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> Nations should specialize in producing those goods for which they have an Absolute Advantage. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> Nations should export goods for which they have a higher opportunity cost. ||

== <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">absolute advantage || <span style="font-family: Verdana,Geneva,sans-serif;">the ability to produce a good using fewer inputs than another producer ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">comparative advantage || <span style="font-family: Verdana,Geneva,sans-serif;">the ability to produce a good at a lower opportunity cost than another producer ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">exports || <span style="font-family: Verdana,Geneva,sans-serif;">goods produced domestically and sold abroad ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">imports || <span style="font-family: Verdana,Geneva,sans-serif;">goods produced abroad and sold domestically ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">opportunity cost || <span style="font-family: Verdana,Geneva,sans-serif;">whatever must be given up to obtain some item ||