ECON 201 1st Edition Lecture 7 Outline of Last 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 advantageOutline of Current Lecture I. Specialization ReviewII. Absolute and Comparative Advantage Example 1III. Absolute and Comparative Advantage Example 2IV. Points to PonderV. Unanswered Questions about TradeCurrent LectureI. Specialization ReviewAs discussed in the last lecture notes, specialization can lead to gains from trade. Two types of advantages of these gains are absolute advantage and comparative advantage. Absolute advantage is the ability to produce a good using fewer inputs than another producer (individual or country). Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. II. Absolute and Comparative Advantage Example 1In the first example, Peru and Guatemala each have 100 hours of labor per month and the following technologies. For Peru, producing one pound of coffee requires two hours, while producing one bottle of wine takes four hours. For Guatemala, producing one pound of coffee takes one hour, while producing one bottle of wine takes five hours. Who has the absolute advantage in coffee and who has the comparative advantage in wine?Peru1 lb. coffee = 2 hours1 bottle of wine = 4 hoursGuatemala1 lb. coffee = 1 hourThese 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.1 bottle of wine = 5 hours From the information above, it is clear that Guatemala has the absolute advantage in coffee. It takes them only one hour to produce one pound of coffee while it takes Peru two hours. As for who has the comparative advantage in wine, that goes to Peru. It takes Peru only four hours to produce a bottle when it takes Guatemala five hours. Notice on this problem that because we are given the products in terms of the hours they take to produce, we do not need to do any calculations to find the comparative advantage. You only need to see which producer can make the product in the shortest amount of time. However, had they given the information to us in terms of how many products were produced, then we would have needed to calculate comparative advantage. An example is below:Peru20 hours = 10 lbs. of coffee20 hours = 5 bottles of wineGuatemala20 hours = 20 lbs. of coffee20 hours = 4 bottles of wineNotice that this is the same information, just in terms of how many products can be produced in20 hours as opposed to how long it takes to make each product. To solve this one, you can maketwo ratios to find the comparative advantage:Peru5 bottles of wine: 10 lbs. of coffee5 w5=10 c51 w= 2cGuatemala4 bottlesof wine : 20 lbs. of coffee4 w4=20 c41 w=5 cNow that we’ve found the opportunity cost of each product, it is clear that Peru has the lower opportunity cost for wine – they lose only two pounds of coffee for each bottle while Guatemalawill lose five. Peru has the comparative advantage in wine.III. Absolute and Comparative Advantage Example 2In this example, Denmark and Finland produce two goods: bread and cakes. Denmark can use all of their labor hours to produce either 16 loaves of bread or 32 cakes. Finland can use all of their labor hours to produce either 30 loaves of bread or 20 cakes. Who has the absolute advantage in cakes and who has the comparative advantage in cakes? Well, if Denmark can produce 32 cakes with their resource hours while Finland can only produce 20, then Denmark has the absolute advantage in cakes. To calculate who has the comparative advantage in cakes,we can use the same formula that we used for Peru and Guatemala by calculating the opportunity cost of cake in each country.Denmark32 cakes: 16 loaves of bread32 c32=16 b321 c= 0.5 bFinland20 cakes: 30 loaves of bread20 c20=30 b201 c=1.5 bDenmark also has the comparative advantage in cakes, because they can produce cakes at a lower opportunity cost than Finland can. Denmark loses half of a loaf of bread in producing one cake, while Finland loses one and a half loaves. IV. Points to PonderCan policy change comparative advantage? - Yes. As briefly discussed in the previous lecture notes, a country’s policy can change theircomparative advantage by means of tariffs, subsidies, or labor laws, to name a few.How can we respond to the statement “imports are a sign of weakness”?- Both countries can be better off with trade. You are throwing away the gains from trade if you view it like this. Because both countries can benefit from it, it is by no means a “sign of weakness”.What about the “content” of imports and exports?- It does matter what you import and export as well as how much you import and export. A country can put all of their eggs in one basket, so to speak, by investing solely in imports or exports. Becoming too dependent on one or the other isn’t healthy for a country’s economy. If you do this, you are exposed to the vagaries of the market and the GDP and net exports could fall a great amount. The following website shows the amountthat countries imported and exported from 2010-2013: http://www.economist.com/blogs/graphicdetail/2014/12/commodity-dependency?zid=293&ah=e50f636873b42369614615ba3d6df4a V. Unanswered QuestionsAll of what we have covered so far in this class is largely built on assumptions. All of the models, specialization, trade, and production as well as quantities that the countries produce, make, consume, and the prices incorporate many assumptions.Are there times a country does not want to specialize and trade?- Yes, there are some times when a country may not want to trade with another. Examplesinclude issues of national defense and an infant industry (an industry just beginning). However, you end up fostering inefficiency.Overall, trade can make everyone better off collectively. Though it may leave some individuals worse off, collectively everyone