ECON 201 1st Edition Lecture 6 Outline of Last Lecture I. Example PPF Model ContinuedII. Real Life PPF ApplicationsIII. The PPF: What We Know So FarIV. The PPF and Opportunity CostV. The PPF and Opportunity Cost ExampleVI. The Shape of the PPFVII. Efficiencya. Definition of productive efficiencyb. Definition of allocative efficiencyVIII. Economic Growth and the PPFOutline of Current Lecture I. Tradea. Definition of specializationII. Trade and the PPF Examplea. Definition of exportsb. Definition of importsIII. Benefits of Tradea. Definition of absolute advantageb. Definition of comparative advantageCurrent LectureI. TradeIs trade necessary? No, trade is not necessary in an economy but it can improve it and make everyone better off. Specialization is when people or countries specialize in producing one goodor service. They can then exchange it for other goods, resulting in trade. Specialization is an important facet of trade.II. Trade and the PPF ExampleThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Assume that two countries, Japan and the United States, produce two goods: computers and wheat. The United States can produce one computer with 100 labor hours and one ton of wheatwith 10 labor hours; they have a total resource of 50,000 labor hours. Japan can produce one computer with 125 labor hours and one ton of wheat with 25 labor hours; they have a total resource of 30,000 labor hours. Without trade, and assuming the U.S. uses exactly half of the labor hours for computers and wheat, they can produce 250 computers and 2500 tons of wheat, as shown in the graph below. If Japan also uses half of their labor hours to produce their goods, how many computers and tons of wheat will they produce? Half of the labor hours: 30,000÷ 2=15,000One computer=125 hoursOne tonof wheat=25 hours15,000 hours÷ 125 hours=120 computers15,000 hours÷ 25 hours=600 tons of wheatThe two graphs below display the United States’ PPF and Japan’s PPF without trade.0 100 200 300 400 500 6000100020003000400050006000PPF of the United States without TradeComputersWheat (in tons)0 100 200 300 400 500 6000500100015002000250030003500400045005000PPF of Japan without TradeComputersWheat (in tons)Given the information above, we can determine the total world consumption without trade by combining the United States’ production with Japan’s production. This is shown in the table below. United States Japan World ProductionComputers 250 120 370Tons of Wheat 2500 600 3100All of these calculations have been done with the assumption that there is no exchange of goods between the United States and Japan. Now, if we assume that international trade does occur, we can evaluate how many exports one country gives and how many imports it receives. Exports are goods produced domestically and sold abroad, while imports are goods produced abroad and sold domestically. Now let’s solve the trade example below.1. If we assume that the United States produces 3,400 tons of wheat, how many computers will they be able to produce? 2. If we assume that Japan produces 240 computers, how many tons of wheat will they be able to produce? 3. If trade occurs between the two countries and the United States exports 700 tons of wheat and Japan exports 110 computers, how many products do both countries end up with?The first two problems are easily solved using the information we’ve been given previously and by constructing the two equations below. United States 100 x+10 y=50000Japan 125 x+25 y=30000In the equations above, x represents the number of computers produced and y represents the tons of wheat produced. The coefficients are the labor hours that it takes to make a computer and a ton of wheat for each country, and the numbers on the other half of the equation are the total labor hours. For Problem #1, if the United States has 3,400 tons of wheat, this is the value of variable y. By plugging it in, we can easily solve for x:100 x+10(3400)=50000100 x=16000x=160So, the United States will produce 160 computers if they use the remaining hours to produce 3,400 tons of wheat. The second problem is solved in exactly the same way, only this time we use the second equation instead of the first and solve for the y variable.125(240)+25 y=3000025 y=0y=0Thus, Japan would use all of their available resources in producing 240 computers and they would be unable to produce any amount of wheat. Now that we know how many products eachcountry is producing, we can solve the final problem. The last problem is simple addition and subtraction, and this is shown in the table below for both countries.United StatesComputers WheatProducts 160 3400+ Imported + 110 0- Exported 0 - 700Amount Consumed 270 2700JapanIf you graphed the data from these tables on the PPF for these two countries, you would see that the data points would go beyond the production curve. This is because with specialization and exchange, consumption possibilities are no longer constrained by the curve (as the curve restricts production, not consumption). III. Benefits of TradeAs shown in the tables above, both countries experience a gain as a result of the trade. These gains can be categorized as two different types of advantages: absolute and comparative. Absolute advantage is the ability to produce a good using fewer inputs than another producer (individual or country). Absolute advantage can lead to specialization and gains from trade. To determine which country above has the absolute advantage in computers and wheat, compare the amount of labor hours it takes to produce each product.United States: 1 ton of wheat = 10 labor hoursJapan: 1 ton of wheat = 25 labor hoursThe United States has the absolute advantage here because they can produce the same amountof wheat for fewer labor hours than Japan. Now let’s look at the computers.United States: 1 computer = 100 labor hoursJapan: 1 computer = 125 labor hoursThe United States also has the absolute advantage here – they require less hours to produce one computer than Japan. So the United States has the absolute advantage regarding both goods. Absolute advantage measures the cost of a good in terms of the inputs required to produce it. Another way to view advantage is by looking at the opportunity cost; in this example, the opportunity cost of a computer is the wheat that could be produced using that same labor. Comparative