lecture 4 economic growth trade and specialization an introduction to markets
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Lecture 4
Economic Growth Trade and Specialization An Introduction to Markets.
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Economic Growth
Economic growth is illustrated by an economies expansion in production over time.
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Economic Growth
The Cost of Economic Growth The development of new goods and better
ways of producing goods and services is technological change.
The growth of capital resources is capital accumulation.
Does economic growth allow us to avoid opportunity costs?
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Economic Growthc
1 2 3 4 5 6 7 Tapes (millions per month)
2
4
6
10
8
Tap
e-m
akin
g m
achi
nes
(per
mon
th)
b
a
PPF0
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4 5 6 7 Tapes (millions per month)
Economic Growth
1 2 3
2
4
6
10
8
Tap
e-m
akin
g m
achi
nes
(per
mon
th) c
b
a
PPF0
If we allocateno resources tomachines, we canmake 5 million tapes a month (a).
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Economic Growthc
However, if weproduce 6 machinesa month (b), thenthe PPF rotates. We will be able to produce more tapes in the future.
1 2 3 4 5 6 7 Tapes (millions per month)
2
4
6
10
8
Tap
e-m
akin
g m
achi
nes
(per
mon
th)
b
a
PPF0 MACRO HAPPENS
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Economic Growth
Tap
e-m
akin
g m
achi
nes
(per
mon
th) c
1 2 3 4 5 6 7 Tapes (millions per month)
2
4
6
10
8
b
a
PPF0 PPF1
However, if weproduce 6 machinesa month (b), thenthe PPF rotates. We will be able to produce more tapes in the future.
b'
a'
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Economic Growthc
Regardless, we stillincur an opportunitycost. We had to decrease the number of tapes produced from 5 to 3 million in order to produce more machines..
1 2 3 4 5 6 7 Tapes (millions per month)
2
4
6
10
8
Tap
e-m
akin
g m
achi
nes
(per
mon
th)
b
a
PPF0 PPF1
b'
a'
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Economic Growth in the United States and Hong Kong
Since 1960, Hong Kong has grown more rapidly than the United States Hong Kong has devoted a bigger
fraction of its resources to accumulating capital.
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Economic Growth in theUnited States and Hong Kong
Consumption goods (per person)
Cap
ital
goo
ds
(per
per
son
)
aa
Hong Kongin 1960
United Statesin 1960
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Economic Growth in theUnited States and Hong Kong
Consumption goods (per person)
Cap
ital
goo
ds
(per
per
son
)
aa
c
b
Hong Kongin 1960
United Statesand Hong Kongin 1997United States
in 1960
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Choices for HS Graduate
ED
consumption
hs
choices
college grad
choices
current consumption
can influence future choices
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Gains from Trade
Comparative Advantage A person or nation has a comparative
advantage in an activity if they/it can perform an activity at a lower opportunity cost than others.
Why is there a difference?• Differences in abilities
• Differences in resource characteristics
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Comparative Advantage Tom’s Factory
Can produce 4,000 lengths of tape/hour or Can produce 1,333 cases/hour
Opportunity Cost To produce 1 case, he must decrease tape
production by 3 lengths — opportunity cost. To produce 1 length of tape, he must
decrease case production by 0.333 case — opportunity cost.
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Comparative Advantage
1 2 3 4 Tape (thousands of lengths per hour)
1
2
3
5
4
Cas
es (
thou
sand
s pe
r ho
ur)
Tom’sPPF
Tom’s opportunity cost:1 tape costs 1/3 case, and 1 case costs 3 tapes
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Comparative Advantage Nancy’s Factory
Can produce 1,333 lengths of tape/hour or Can produce 4,000 cases/hour
Opportunity Cost To produce 1 case, she must decrease tape
production by 0.333 lengths — opportunity cost. To produce 1 length of tape, she must decrease
case production by 3 cases — opportunity cost.
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Comparative Advantage
1 2 3 4 Tape (thousands of lengths per hour)
1
2
3
5
4
Cas
es (
thou
sand
s pe
r ho
ur)
Nancy’sPPFNancy’sPPF
Nancy’s opportunity cost:1 tape costs 3 cases, and 1 case costs 1/3 tape
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Comparative Advantage
1 2 3 4 Tape (thousands of lengths per hour)
1
2
3
5
4
Cas
es (
thou
sand
s pe
r ho
ur)
Nancy’sPPFNancy’sPPF
1Tom’sPPF
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Comparative Advantage
1 2 3 4 Tape (thousands of lengths per hour)
1
2
3
5
4
Cas
es (
thou
sand
s pe
r ho
ur)
Nancy’sPPFNancy’sPPF
1Tom’sPPF
4 b'
b
c
a
Nancy’s opportunity cost:1 tape costs 3 cases, and 1 case costs 1/3 tape
Tom’s opportunity cost:1 tape costs 1/3 case, and 1 case costs 3 tapes
Trade line
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Comparative Advantage
1 2 3 4 Tape (thousands of lengths per hour)
1
2
3
5
4
Cas
es (
thou
sand
s pe
r ho
ur)
Nancy’sPPFNancy’sPPF
1Tom’sPPF
4 b'
b
c
a
Nancy’s opportunity cost:1 tape costs 3 cases, and 1 case costs 1/3 tape
Tom’s opportunity cost:1 tape costs 1/3 case, and 1 case costs 3 tapes
Trade line
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Absolute Advantage
An absolute advantage exists when a person or nation can produce more of a good than another.
Individuals and nations can have absolute advantages in any or all goods.
However, it is not possible to have a comparative advantage in everything.
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The Market Economy
Two key social institutions organize trade among nations. Property rights
• Real
• Financial
• Intellectual
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The Market Economy
Two key social institutions organize trade among nations. Markets
• A market is any arrangement that enables buyers
and sellers to get information and to do business
with each other.
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Circular Flows in the Market Economy
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The Market Economy Coordinating Decisions
Markets coordinate individual decisions through price adjustments.
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Role of Economics in Action
You must work with EIA to reinforce your understanding of trade and specialization
The exam will reflect the tutorial and review questions in chapter 3 of EIA
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