Ho Chi Minh University of Foreign Languages and Information Technology INTERDEPENDENCE AND THE GAINS FROM TRADE  Group MC: Nguyen Le Anh Dao Do Hoang Hai Anh Ta Ngoc Quynh Nhu Vu Thi Ngoc Phuong Nguyen Vu Hai Thao Nguyen Thi My Ngan Vo Thi Kim Hang Duong Hoang An Pham Thanh Thao Ly Phong Content   Problem 1: The Parable for the modern economy  Production possibilities  Specialization and Trade  Problem 2: Comparative Advantage: The Driving Force of Specialization     Absolute advantage Opportunity cost and Comparative Advantage Comparative advantage and Trade The Price of the Trade  Problem 3: Applications of Comparative Advantage  Should Tom Brandy Mow His Own Lawn?  Should the United States Trade with other Country? Problem 1: The Parable for the modern economy Production possibilities:    Specialization and Trade   What is Specialization? Specialization is a method of production where a business , area or economy focuses on the production of a limited scope of products or services to gain greater degrees of productive efficiency within an overall system  THE RELATIONSHIP BETWEEN SPECIALIZATION AND TRADE   Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own Countries produce a surplus of the product in which they specialize and trade it for a different surplus good of another country The traders decide on whether they should export or import goods depending on comparative advantages Problem 2: Comparative Advantage: The Driving Force of Specialization Absolute advantage THEORY OF ABSOLUTE ADVANTAGE   Developed by Adam Smith  Under free and unregulated trade, a nation should specialize in producing those goods it could produce most efficiently (had an absolute advantage, either natural or acquired)  The capability of a nation to produce more of a good with the same amount of input than another country  In our example, we assumed that the farmer and the rancher each spend hours a day working  Time spent producing potatoes, therefore, takes away from time available for producing meat  The rancher and farmer give up units of one good to produce units of the other  The opportunity cost measures the trade-off between the two goods that each producer faces  The opportunity cost of meat is the inverse of the opportunity cost of potatoes  Economist use the term comparative advantage when describing the opportunity cost of two producers  The producers who gives up less of other goods to produce good X has the smaller opportunity cost of producing good X and is said to have a comparative advantage in producing it  An ounce of potatoes costs the farmer only ¼ ounce of meat, but it costs the rancher ½ ounce of meat The rancher has a lower opportunity cost of producing meat than the farmer  The farmer has a comparative advantage in growing potatoes, and the rancher has a comparative  Comparative advantage reflects the relative opportunity cost  Unless two people have exactly the sam opportunity cost, one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good  Comparative Advantage: The Driving Force of Specialization   Comparative Advantage and Trade The gains from specialization and trade are based not on absolute advantage but on comparative advantage When each person specializes in producing the good for which he or she has a comparative advantage, total  What is comparative advantage?  An economic law referring to the ability of any given economic actor to produce goods and service at a lower opportunity cost than other economic actors Ex: two countries producing only two goods - motor cars and commercial trucks  Country A can produce 30m cars or 6m trucks, and country B can produce 35m cars or 21m trucks  country B has the absolute advantage in producing both products  it has a comparative advantage in trucks because it is relatively better at producing them  Country B is 3.5 times better at trucks, and only Problem 3: Applications of Comparative Advantage  Should Tom Brandy Mow His Own Lawn?  The principle of comparative advantage explains interdependence and the gains from trade Opportunity cost of the item is what we give up to get the item What does Tom with hours? Mow his own lawns Film the TV show and get $20,000 What does Gump with hours ? Mow Tom’s lawns Work at McDonald and get $40 Tom has absolute advantage in mowing his own lawns because he takes lower time than Gump (2hrs < 4hrs) Gump has a comparative advantage in moving lawns because his opportunity costs is only $40 but Tom is $20,000 The better for both of them is Tom films the TV show and hires Gump to mow his lawns  Should the United States Trade with other Country?   More than 41 million American jobs depend on trade   Manufacturing is the sector that exports the most, with more than $1.4 trillion worth of exports in 2014  The U.S Department of Commerce estimates that exports of manufactured goods directly support approximately 6 million U.S factory    The United States exported $1.45T and imported $2.19T in 2014  Exports of goods and services full  The economic benefits of U.S trade • • • • Higher Wages Increased Economic Growth Better Working Conditions Supporting more productive, higher paying jobs in our export sectors • Expanding the variety of products for purchase by consumers and business • Encouraging investment and more rapid economic growth ... advantage explains interdependence and the gains from trade Opportunity cost of the item is what we give up to get the item What does Tom with hours? Mow his own lawns Film the TV show and get $20,000... to produce units of the other  The opportunity cost measures the trade- off between the two goods that each producer faces  The opportunity cost of meat is the inverse of the opportunity cost... advantage and they trade these goods for the goods produced by other countries Example: Assume that there are only two countries - Country A and Country B - producing only two goods, corn cereal and