Slide 1Main lessons from Chap 3Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 111Mankiw: Chap 3Gains from specialization and trade• production possibility frontiers• absolute advantage• comparative advantage• consumption possibilities without trade• consumption possibilities with trade• specialization2Main lessons from Chap 3•Specialization expands ________________ hence trade is good for society•Specialization and trade is good even for countries _____________________________________________________•________facilitate specialization and trade31. Tom and Jerry can work 8 hrs per day (40 hrs a week) Production possibilities Minutes needed to make 1 oz of:Amount produced in 8 hoursmeat potatoes meat potatoesTom(Farmer)60 min /oz 15 min /oz 8 oz 32 ozJerry(Rancher)20 min /oz 10 min /oz 24 oz 48 oz4 2. Production possibility frontiers potatoes (oz.)Tommeat (oz.)potatoes (oz.)JerryWhat happens to Tom’s PPF if he works for 48 hours a week? meat (oz.)5•Opportunity cost of an oz. of potatoes in terms of meat = = of the production possibility frontierWhat is the opportunity cost of producing an oz. of potatoes for Tom? For JerryWhat is the opportunity cost of producing meat for Tom? For Jerry? •Tom has ______________ in potatoes and Jerry has _______ in meat. •Comparative advantage comes from differing ____________6•Jerry has _________________ in the production of both.Why?examples of developing and developed countriesAside (not important for exams)Production possibility frontiers can be linear or a curve. It is linear whenIt is a curve when7 3. Consumption possibility frontiers without trade meat potatoesTom consumes A if he divides his time ½ and ½ meatpotatoesJerry consumes B if he divides his time ½ and ½8Suppose they decide to trade. A central planner decides (arbitrarily) that the price is 3 oz. of potatoes for 1 oz. of potatoes.• Tom spends• Jerry spends• Jerry trades• Tom consumes • Jerry consumes Outcome?9 4. Consumption possibility with trade meat potatoesmeatpotatoesTomJerry10Asides:Outcome of trade - Both can consume outside their production frontier• Prices are arbitrarily chosen by the central planner here. In real economies they are determined by market forces (Chap 4).• How Tom and Jerry divide their time (degree of specialization) between the production of meat and potatoes depend on the prices –•This is a case of incomplete specialization -115. Relationship between trading prices, comparative advantages and specializationTom’s opportunity cost:Jerry’s opportunity cost:Arbitrarily chosen trading prices:Conclusions:• So long as trading prices are• Each _________ the product they have a _________________in and _________ the
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