ECO2030 1st Edition Lecture 6 Outline of Last Lecture I. The Opportunity Cost and the shape of the PPFOutline of Current Lecture II. Why Economists AgreeIII. Trade and the PPFIV. Absolute AdvantageV. Comparative AdvantageCurrent LectureWhy economists disagree?● Most economists agree about 70% of the time. ● Most of the time economists agree with positive theories. ● Disagree about certain normative views usually based on conflicting views/ideologies about which policy to pursue.Propositions about which most economists agree ● A ceiling on rents reduces the quantity and quality of housing available. (93%)● Tariffs and import quotas usually reduce general economic welfare. (93%)● The United States should not restrict employers from outsourcing work to foreign countries. (90%)● The United States should eliminate agricultural subsidies. (85%)● The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%) This is because more money is being given out than is coming in through taxes. (unsustainable)● A large federal budget deficit has an adverse effect on the economy. (83%)● A minimum wage increases unemployment among young and unskilled workers. (79%)● Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)Definitions● Tariff = tax on imported goods● Pollution Ceiling = pollution limits● Import quotas = cap on quantity of goods importedChapter 3:Interdependence:Principle: trade can make everyone better off. ● Trade maximizes efficiency● With trade both countries can get outside of their PPF!Exports = to sell domestically produced and sold abroadImport = goods produced abroad and sold domesticallyRecall from Lecture 5 the scenario pertaining to the PPF. We had 2 countries (US and Japan) 2 goods (Wheat and Computers) and 1 resource (hours/labor).● The US has a total of 50,000 labor hours○ 1 Computer = 100 hours○ 1 Ton Wheat = 10 hours● Japan has 30,000 labor hours○ 1 Computer = 125 hours○ 1 Ton Wheat = 25 hoursLets say that the US decides to produce 160 Computers and 3400 Tons of Wheat, And Japan decides to produce only computers (240). ● So with no trade both both decisions about how much of what to produce are on the line provided all resources are used.Now lets suppose that the US exports 700 Tons of wheat to Japan and imports 110 computers. So Japan Imports 700 Tons Wheat and exports 110 computers. As you can see trade can increase efficiency the the point where it exceeds the limitations of the blue line. (This is only possible with trade).Where do these gains come from? Two Ways:● Absolute advantage = the ability to produce a good using fewer inputs than another producer - based on inputs and efficiency. (US used fewer inputs than Japan).The US has an absolute advantage in producing computers and wheat because both products require fewer hours to produce.● Comparative advantage = the ability to produce a good at a lower opportunity cost than another country. Based on opportunity cost, one country has to have acomparative advantage in one product and the other country has to have a comparative advantage in the other product. Japan has a greater comparative advantage on computers because their absolute disadvantage was smaller with computers than it was with wheat. (Japans disadvantagewas greater in producing wheat (10 vs 25 hours). To know which country has the comparative advantage you have to know the Opportunity Cost:● Opportunity Cost of 1 computer in the US is 10 tons wheat because this is what you have to give up to make a computer (100 hours). ● Opportunity Cost of 1 computer in Japan is 5 tons wheat because this is what you have to give up to make a computer (125 hours)So Japan has the comparative advantage because the Opportunity cost is
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