3.2 comparative advantage

Thecircular flow model is a model of theeconomy that shows the circular flow of expenditures and incomes that resultfrom decision makers’ choices, and the way those choices interact to determinewhat, how, and for whom goods and services are produced.

LectureLauncher: Just as “no man is an island”neither is any economic actor. We are all touched by the actions of another.That’s the idea behind the circular flow model. So start by asking them whatthey’ve bought today—coffee, gasoline, breakfast sandwich, etc. How did theyobtain them? Where did those things come from? How did the vendor get them? Howdoes the vendor pay for them? For his employees?

        Another approach is to discuss howstudents pay their tuition. For example, inGeorgia, state income taxes supportthe system of higher education, in addition to lottery profits which pay forscholarships and grants. Even if a student does not have a scholarship orgrant, his or her education is being heavily subsidized. An otherwise unfundedcollege student in Georgia would have to pay approximately four times more intuition without state support. That funding comes from all our taxes—so that I,the teacher, am being paid for out of their taxes as well as their tuition andexpenses.

Householdsand Firms

·        A household is an individual or a group of people living together. A firm is an economic unit that organizes the production of goods andservices.

Markets

·        A market is any arrangement that enables buyers and sellers to get informationand to do business with each other. Goods markets are the markets in which goods and services are bought and sold; factormarkets are the markets in which the services of factorsof production are bought and sold.

Real Flows and Money Flows

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• Firms     and households interact in markets and it is this interaction that determines     what will be produced, how it will be produced, and who will get it. The     real flows are the goods and services and the factors of production. The     money flows go in the opposite direction to the real flows

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• Prices     within markets coordinate firms’ and households’ decisions.

Willingness to pay affects production andproduction affects willingness to pay. It would appear that we have the classic“which came first, the chicken or the egg” conundrum. However, in the nextchapter, we will discuss the most powerful model in economics, Demand andSupply, which allows us to think clearly about the behavior of markets.

Governments in theCircular Flow

·        Thefederal government has three major expenditure categories: public goods and services,social security and welfare payments, and transfers to state and localgovernments. It collects three main taxes: personal income taxes, corporate(business) income taxes, and social security taxes.

·        Thestate and local governments have two major expenditure categories: goods and services,and welfare benefits. They collect three main taxes: sales taxes, propertytaxes, and state income taxes.

·        Inthe circular flow, governments buy goods and services from firms. Householdsand firms pay taxes to, and receive transfers from, governments.

·        National debt is the total amountthat the federal government has borrowed to make expenditures that exceed taxrevenue; that is, to run a government budget deficit.

Circular Flows in theGlobal Economy

·        International Trade

·        Imports are the good andservices that we buy from households and firms in other countries. Exports are the goods andservices that we sell to households and firms in other countries.

·        InternationalFinance

·        Whenfirms, households, or governments want to borrow or lend money, they cancompare interest rates in their economy to interest rates in other economies.They look for the lowest interest rate at which to borrow and the highest atwhich to lend

·        Whenthe value of our imports exceeds the value of our exports, we must borrow fromthe rest of the world. When the value of our exports exceeds the value of ourimports, we lend to the rest of the world.

·        It is internationaltrade and international finance flows that tie nations together in the globaleconomy and through which global booms and slumps are transmitted.

 

 

USING EYE ONTHE U.S. Economy

nWhat We Produce

This Eyeprovides an overview of production in theU.S.according to the relativemagnitudes of the four categories of goods and services and the largest areasof production within those categories. This set of results sets the stage for discussingtheU.S.economy as very consumer driven (because consumption goods and services accountfor nearly two-thirds of all domestic production) and recognizes the significantrole that governments play in our economy (as nearly one-fifth of all productionis bought by governments). Students often lose sight of the fact that becausethey don’t see “Made in theU.S.A.”on everything they purchase, it doesn’t mean everything they buy was imported –it’s just that the domestically produced services they consume don’t havelabels printed on them like the imported electronics, clothing, and toys theypurchase!

USING EYE ONTHE PAST

nChangesin What We Produce

This Eyeprovides information every educated student needs to know. Point out to yourstudents that we always hear of job losses in the manufacturing sector andthese losses are always presented as “new” and “bad.” While the losses may ormay not be “bad,” your students need to know that they are certainly not new:Manufacturing has shrunk in importance since at least 1950. Point out to yourstudents that most likely they are going to be employed in the servicesector—that is where the jobs are because that is what we produce. Indeed, asthe figure shows, over 80 percent of employment nowadays is in services!

USING EYE ONTHEU.S.Economy

nChanges in How We Produce in the Information Economy

After presentingstudents with the graph demonstrating job changes, you might want to ask themwhat fundamental changes in the economy have been underway in theUnited States.The likely response is that the goods and services that we produce today andwill produce tomorrow are different than in decades past. This answer isbasically correct. In the 1970s, manufacturing was a more dominant part of theeconomy.

Technology hasadvanced tremendously over the last 40 years. Challenge your students to asktheir folks if they used a computer at any point in their high school orcollege education. Many of your students’ folks will never have seen, much lessused, a computer when they were in high school or college. Today, of course,virtually all students have computers. It has been estimated that in 1965 therewere 20,000 computers in the world. Today, if your college has more than 20,000students, it is likely the case there are more than 20,000 computers associatedwith your college alone! This amazing fact really makes clear that how weproduce goods and services has undergone massive changes.

USING EYE ONTHE iPHONE

nWho Makes the iPhone?

Ask your studentswhy Apple chooses to have the components for the iPhone manufactured by morethan 30 companies around the world, as opposed to producing everythingthemselves. ForU.S.consumers and producers, what are the pros and cons associated with Apple’sdecisions to outsource production? It is important to identify here that thespecialization of factors of production results in lower production costs, evenafter factoring in transaction and transportation costs. Also point out thatoften the least expensive way for domestic production to take place is not to relysolely on domestic producers, but to take advantage of factors of production inthe global economy. Through this process, domestic producers become dependentupon foreign producers, just as foreign producers become dependent upondomestic producers. What are the advantages and disadvantages of thisinterdependence?

USING EYE ONYOUR LIFE

nTheU.S.and Global Economies in Your Life

This Eye discusses how your students willinteract with international trade in their careers and as voters. Though notdirectly related to this topic, you can—and probably should—take theopportunity to explain to students what they can do with an economics major.Many students are interested in economics as a major but hesitate because theydo not know about the careers they can follow with economics as their major.Point out to your students that economics is an excellent major for anyoneconsidering advanced degrees in law or in the different public policy arenas.It also is a great background for anyone considering a career in politics.

Additionally,economics is a wonderful major for students who plan to enter the workforceafter obtaining their bachelor’s degrees. I contrast economics with degrees infinance and in marketing. I point out that all three degrees essentiallyprepare students for entry level management jobs. But they differ in their emphasis.A marketing degree will teach students what factors help sell products andabout distribution networks. Marketing majors tend to find jobs in retail, inPR, and in similar areas. Finance majors learn a lot about a very importantsector of the economy and very important part of running a firm. Finance majorstend to find jobs with banks, insurance companies, and other similar firms.Economics majors differ insofar as they do not learn so much about importantsectors of the economy or important aspects of running firms. Instead theylearn how to think  quantitatively andlogically about issues. In particular, they really learn how to use marginalanalysis, introduced in Chapter 1, in alldecision making processes. This method of thought is extremely powerful and sobusinesses are willing to pay a lot for students who have acquired it, which iswhy economics majors are, on the average, paid more than marketing majors andoften more than finance majors. The average starting salary for a 2010 collegegraduate with an economics major was $51,698, which has the highest startingsalary for a non-engineering major (business was $46,672 and the liberal artsmajors was $35,508). The jobs economics majors take tend not to be asconcentrated as with marketing and finance. For instance, it is uncommon, butstill possible, for a marketing major to take a job with a bank and a financemajor to take a job with a retail company. Economics majors, however, will takejobs with banks and retailing companies with about equal frequency. So youshould reassure your students that if they are thinking of majoring ineconomics, that decision can be a wise choice.

USING EYE ONTHE PAST

nGrowing Government

The fact thatthe U.S. government buys more than 20 percent of total production iscommonplace for our students. They have likely never lived in an era when thegovernment took much less than 20 percent…or much more than 20 percent. Thefigure in this “Eye” can be used to good effect to point out to the studentsthat until 1940, the federal government took much less than 20 percent of totalproduction (other than during World War I) and in World War II, the fractionshot up to over 40 percent. You can point out to your students the trend fromabout 1930 to about 1984 for higher federal outlays as a percentage of total output.Ask them why this trend occurred. Was it good or bad? If the trend had notoccurred, what would be different today? You can also use the huge spikes inWorld War I and World War II to point out that today’s War on Terror (as wellas the war inVietnam)had nowhere near the effects on the economy as did the two world wars. Ask yourstudents what they think would be different if the War on Terror escalated sothat the federal government was spending 40 percent of GDP. What trend do theypredict for the next 10, 20, and 30 years? Will this percentage continue tohover around 20 percent or deviate appreciably from this level?

USING EYE ONTHE GLobal economy

nThe Ups and Downs in International Trade

Ask your students why international trade hasexpanded so rapidly over the past few decades. How do changes in internationaltrade patterns create winners and losers both in theU.S.and abroad? Do they personallyfeel like a winner or loser as a result of these changes in internationaltrade? Students often believe that theU.S.is adversely impacted by trade,though they can quickly identify how they benefit tremendously from lowerprices and a larger variety of imported goods. In fact, it is likely that theyare draped (figuratively and literally) in the gains from international trade –with the clothes they are wearing, with the cell phone in their pocket, withthe purse at their side, and with the automobile (and fuel for that automobile)that got them to class. In fact, without a global economy, they would likelynot have the privilege of learning economics from this Foundations textbook written by Bade & Parkin (who live inCanada).

Why does international trade slow down (or even shrink) during arecession? Does this help an economy during a recession or magnify the problemsan economy is experiencing? Does global economic interdependence provide moreor less stability for an economy? Will international stay around its averagegrowth rate of around 7 percent a year after the global economy rebounds, orhas the level of international trade reached a plateau for the foreseeablefuture? All of these questions areworthy of discussing with your students!

ADDITIONALEXERCISEs FOR ASSIGNMENT

n  Questions

n   Checkpoint 2.1  What, How, and For Whom?

1.     Identify each of the goods or servicesbelow as belonging to one of the following categories: consumption good(service), capital good (service), government good (service) or export good(service).

1a.  Restaurant meals

1b.  Video rentals

1c.   Computer produced in theUnited Statesand purchased by aGerman company.

1d.  Nuclear submarine

1e.   Oil rig

1f.   Haircut

1g.  Factory

1h.  Courthouse

2.     Identifythe payments that are made to each of the four factors of production.

3.     Commenton the following assertion: “If the trends in schooling continue, at some pointin the future, everyone will have a college degree and no one will be availableto work as a janitor or garbage collector.” Critically evaluate this statement.

n   Checkpoint 2.2  The GlobalEconomy

4.     Classifythe following countries as advanced or developing countries:Australia,Chile,China,France,India,Indonesia, Hong Kong,Mexico,Nigeria, andPeru.

5.    Thinkabout the trends in what and how goods and services are produced in theU.S.and global economies. Do you think that at some future time, there will be nojobs in theUnited Statesand all the jobs will be in developing economies ? Explain your answers

n   Checkpoint 2.3  The CircularFlows

6.     Inthe goods market, households and firms both have a role to play. In the factormarkets these roles are reversed. Why does the reversal occur?

nAnswers

n   Checkpoint 2.1  What, How, and For Whom?

1a.  consumption good

1b.  consumption service

1c.   export good

1d.  government good

1e.   capital good

1f.   consumption service

1g.  capital good

1h.  government good

2.     Wages are paid to labor, rent to land,interest to capital, and entrepreneurs receive a profit or incur a loss.

3.     This statement exaggerates and is untrue.If the trend toward higher education continued unabated at the current rate, itwould be well into 2100 before 100 percent of the population had collegedegrees. But the trend will not continue because many individuals do not havethe necessary talents to graduate from college. And even if everyone possesseda college degree, if the pay offered as a janitor or garbage collector issufficiently high, college graduates will accept these jobs.

n   Checkpoint 2.2  The GlobalEconomy

4.     Theadvanced economies includeAustralia,France, and Hong Kong. The developing economies includeChile,China,India,Indonesia,Mexico,Nigeria, andPeru.

5.     Wewould not expect all jobs to move from theUnited Statesto other nations.Relative to the rest of the world, workers in theUnited Stateswill remain highlyskilled, and likely will increase their average skills even more. These highlyskilled workers will be needed to produce goods and services that must beproduced using skilled rather than unskilled labor.

n   Checkpoint 2.3  The CircularFlows

6.     Householdsare the buyers in the goods market and firms are the sellers. In this market,households pay firms money in exchange for goods and services. In the factormarkets, the roles are reversed. Households are the sellers of labor, land,capital, and entrepreneurship and firms are the buyers. In this market, firmspay households money in exchange for the factors of production.

 

 

 

 

 

 

 

 

 

 

 

What I want to doin this class is make sure we understand he difference between comparativeadvantage and absolute advantage what we learn in the last class is that pattyhad a comparative advantage in plates relative to Charlie because her OC ofproducing one late was laver them Charlie’s OC of producing a plate. Hers wasone-third of a cup. His was three cups. So that’s why it mable sense for her tospecialize in plates. Charlie on the other had had a comparative advantage incups. His OC for producing a cup was only one third of a plate, while patty’swas 3 plates. So that’s why he specialized in cups. Now, we can’t confuse thiswith absolute advantage. Absolute advantage in a given product just means that.You are more productive( 生产率更高)at that thing given the sameing and so if I were tojust give you this graph, and you didn’t know how many workers Charlie or pattyhad. And how many inputs they’re using to produce either thirty cups in a dayor thirty plates in a day. You actually cowld not make any statement aboutabsolute advantage, but if we assume that in all of theses’. They have the samenumber of inputs. So if we think about plates. If we say they each have oneemployee, maybe it’s themselves and given that one inputs or the same number ofinputs. Patty is able to produce more plates than Charlie, than it is true thatpatty aould have an absolute advantage in plates. And if given the same numberof inputs, Charlie is able to produce more cups than patty then he world herean absolute advantage in cups. But it is not because of that absoluteadvantage. that he is specializing in it cups we don’t even know what theirinputs were. It might be that he doesn’t have an absolute advantage. maybe Charlieneeds a hundred people to produce his thirty cups. While patty would have anabsolute advantage. but it just wouldn’t be obvious from this right over here. Butto make everything clear, I want to do a S’ whore Charlie improved his productivityin some way and he actually has the absolute advantage in both products andstill show that as long as they have different comparative advantages then itstill makes sense for them to specialize. So let’s do another S’. so Charliehas improved dramatically. So it’s draw own qittle graph here. That’s our cupsaxis, this is still our plates axis, cup and plates and let’s just put somemore markers here. 10.20.30.40. and 10.20.30.40. and let’s her PPT, so that ispatty’s PPT, just like that. But let’s say that like this. So this is Charlie’sPPT now looks like this so in a given day he can produce and let’s just assumethey’re using the same number of inputs. So using the same number of inputs ina given day he can produce 40 cups. When patty can only produce 10, so he hasthe absolute advantage in cups or in the same given day using the same inputs,he could produce forty plates while patty can only produce 30. So now Charlieall of sudden, has an absolute advantage in both products. But we’ll see it stillmakes sense for them to specialize because they have different comparativeadvantage, they have different OC. So let’s figarce his out, so we have all thesame numbers for patty. Actually let me copy and paste patty’s numbers righthere. Actually we have access to her numbers right over here so I don’t have tocopy and paste it. But let’s think of Charlie’s new numbers now so this is thePPT for Charlie. So this is our now PPT for Charlie maybe he did someinvestment or K&D to get this new acuesome productive PPT. so he’s expandedhis PPT. so what is his OC?  Say he’ssitting here so he’s producing 40cups. What would be his OC of producing 40plates? Well to produce those forty plates, he would have to give up those 40cups. So his OC of 40 plates is equal to 40 cups, or you divide both sides by40. His OC for 1plate is equal to 1cup. And this makes math very easy. His OCfor one cup is equal to 1plate. Now given this new reality so we’ve alreadyestablished Charlie has an absolute advantage in both. Using the same inputs hecan do more of either of them. And remember, when you’re talking about absoluteadvantage you have to think about the amount of inputs you use. Who’s moreproductive in that way but let’s think about comparative advantage. if we thinkabout plates who has a lave or OC for producing a plate? Patty hasn’t Charlieher OC for producing a plate is one-third of a cup. Charlie’s OC for producinga plate has improved, but it’s still worse than patty’s he has to spend 1 cupto make 1plate. She only has to give up one-third of a cup to make a plate. Sopatty still has a comparative advantage in plates and if we look at the OC incups the OC for Charlie to make 1cup is 1plate. So It’s actually a little bitworse than it was before but as we’ll see it ends up being a good thing, he’sjust over all make productive. But his OC for one cup, he’s giving up one platenow, when before he was producing one-third of a plate. And that’s because inthe others’ he was more one-sided, I guess is one way to say it, but his OC forproducing a cup is still cheaper than patty’s. her OC of producing a cup isthree plates; her OC while his is only 1plate. So he still has the comparativeadvantage in cups. So Charlie should still specialize in cups and patty shouldstill specialize in plates and to show that they can still get an outcome thatis beyond even Charlie’s PPT. let’s think about how they could trade. SoCharlie’s going to specialize in cups. He’s going to sit right over thereproducing 40 cups a day. And patty’s going to specialize in plates and she’sgoing to sit right there let me use a different color she’s going to sit rightthere and produce 30plates a day. So how could they trade for mutual benefit? Wellany trade …assuming they don’t want to have only plates or they don’t only wantto have cups assuming that they don’t want to have only plates or they don’tonly want to have cups. Any trade that is cheaper than their OC will be a goodone so for example patty is sitting here producing only plate her OC for a cupis 3plates.so she would be willing to trade anything less than 3plates for acup, assuming that she wants it, because if she had to make the cups herself,she would have to give up 3plates, so let’s say that patty would be willing totrade one plate actually she’d be willing to trade 2plates for1cup. She’d bewilling to trade that. Because if she had to make the cups herself, she’d haveto give up 3plates for 1cup.so she’s willing to trade 2plates for 1cup. And let’ssee if Charlie would be willing to trade 2plates for1cup. So he has all ofthese cups how many cups does he have to give away for a plate well he has togive away 1cup for 2plates or he would have to give up half a cup for a plate,either way, this is better than his OC of trying to get that incremental plate,so he would be willing to do that too:2pltes for 1cup, he’d be willing todo1cup for 2plates, and to see how that would improve, he could have 40cups, orhe could trade one of them away. Actually, let’s do a s’ where he trades on ofthe cups away. So now he only has 20 cups but for those 20 cups he traded away.Actually, that’s a bad example because patty can’t have enough cups. So let’ssay he trades away 10cups for 20plates, so Charlie trades 10cups for 20 plates,so now he trades 10 cups and he gets 20 plates, so now he’ll end up at this s’over hone which was beyond, which was unattainable, when he was working by himself,when he didn’t specialize and get gains from trade so this is a good s’ forhim. He’s able to get outcomes he otherwise would not have been able to get. Hecould, depending on how he trades, he could get outcomes well buy to a cerfainpoint, because patty only has 30cups, so at best he can take all of patty’scups. So he can get something along that line over there. But if we look at thesame s’ patty traded 20 plates for 10cups. Where does that put her? So cups, sothat put her right over here. Once again, beyond her PPT, so thia would looklike a pretty good situation for patty as well

                         OC; 40plates=40cups

                             1plate=1cup

                             1cup=1plate

Patty ; willing totrade 2plates for 1cup

Charlie trades 10cups for 20 plates

3interdependence.ppt(下载附件 1.43 MB)