hello everyone here we are for the second part of our discussion of interdependence and the gains from trade we are on man cues chapter three and we're now going to start to get into our agenda uh we i sort of set things up in the first part of this chapter but now we're going to talk about trade and why it makes sense right why do people tr choose to trade with each other how can trade make people better off and then later on in this set of slides we'll talk about two important concepts that underlie the notion of trade the notion of absolute advantage and comparative advantage we'll define them we'll talk about how they're similar and how they are different so let's get started right so remember we're using as our model the one that we developed in chapter two and earlier in this chapter right the two country model the united states and japan each of these countries produce only two goods computers and tomatoes and they only have one resource available to them labor remember that long think of that long line of people waiting to be told what to do right that's our labor constraint we all have already looked at how much of each good computers and tomatoes each country can produce if they choose to do it themselves right choose to be self-sufficient so they whatever they make the consumers of that country can consume but nothing else because they're limited by our labor constraint in this set of slides we'll look at what happens if each country chooses to trade with the other are they better off can the consumers of that country consume more than they could if the country went it alone and that's what we'll talk about here so again remember our model right the united states have 50 has 50 000 labor hours available to it japan has 30 000 labor hours available to it right before we get into the discussion i just want to make sure you guys are aware of two terms which we'll use right that the things uh the terms are exports and imports so what's an export an export is a good that we make domestically the domestic means within our country right and it's sold abroad sold to other people so united states export might be uh we make well what are we good at we're good at uh making planes boeing boeing uh makes really good planes right where they're made in seattle we make lots of planes some of them are sold to american airlines but some are sold to international airlines so an export might be a plane made by boeing in seattle and sold to klm which is the dutch national airline rights produced domestically sold abroad seattle base seattle uh built plane sold to the netherlands right an import is the opposite a good that is produced abroad and sold domestically so that's something that is made in china and brought into the united states and sold and consumed here so um ipads right although it's an apple product it's assembled in china so we import those assembled ipads from china produced in china sold to you here in albany right that's an import just i just wanted you guys to be aware of those two terms all right so back to our model so suppose the united states makes a bunch of stuff right tomatoes and exports some of those tomatoes to japan they get money for those and then we turn around and use that money to import computers from japan right so the united states exports tomatoes to japan and imports computers the flip side and it's exactly a mirror of what the united states did is that japan then imports those same 700 tons of tomatoes from the u.s and exports those same 110 computers to the united states right so now we have a different combination not of production but of consumption for each good right so we need to look at how much of each good tomatoes and computers are consumed in the u.s and how much of each good tomatoes and consumers uh computers are consumed in japan and we can plot these new combination of goods on each country's production possibility frontier now just recognize i made these numbers up they don't have any basis in reality but again like any model right they tell us something about the world right so here's the united states here's its basic ppf we've developed this in the last chapter and also earlier in this chapter right so united states can choose to make 5 000 tons of tomatoes and no computers that's the upper left a dot on my ppf they could also choose or instead choose to make 500 computers and no tomatoes that's the dot on the lower right hand corner of the line and anything in between right so what is the united states doing now well they choose to produce 160 computers and 3 400 tomatoes that's the dot represented by the the red dot on our ppf right what do we know about that dot two things it's possible it's feasible why because we have enough labor hours to produce that combination of goods it's also what's the other word the e-word efficient it means that everyone on my line all the workers on my line all 50 000 of them have um been told what to do they're all working so we can't get any more production out of our labor force uh at the moment right so they're doing as best they can and that those workers are being told to make 160 computers and 3 400 tomatoes but remember in the last slide we imported some computers right from japan 110 computers we imported from japan right how do we pay for those computers we export right tomatoes we export 700 tons of tomatoes right so where do we end up with what do we end up with right now we have a consumption of 270 computers 160 of those computers we make here and 140 of the i'm sorry 110 of those computers we import for from japan so now we can consume 27 270 computers right what about tomatoes well we made we grew 3 400 tons of tomatoes right we imported none right why would she we import any tomatoes we are making more than we need right but we exported some the extra of 700 tons so we can consume the remainder 2700 tons of tomatoes right so um we end up with a combination of goods represented by that other blue dot now notice something right that dot looks funny right why because it's outside our ppf it's above and to the right of our ppf so you're sitting there and selling me and saying to me hey bulko you told me that that's not feasible we can't do that right why are we going why are we doing that why why we how are we able to consume that combination of goods well i'm not crazy i'm not lying to you remember our definition of the ppf right it's the combination of two goods that a country can produce can produce but remember the underlying phrase right given the resources and technology available to it all right i'm not i'm not lying right because we have done what we have added resources right we've changed the amount of resources we have available to us the thing is they're not u.s resources they're japanese resources we're using their resources to support our own consumption right so i'm not lying this is feasible if we trade right because we're glomming onto japanese resources right so let's look at japan similar right there's their original ppf they can choose to make 125 to make tons of tomatoes or 200 and was that 240 250 right computers right um and anything in between but we're telling you that they originally decided to make 240 computers and no tomatoes that's the red dot right they produce lots of computers no tomatoes but they gotta eat right so they import some tomatoes the very same 700 tons of tomatoes that we export to japan right so that's their imports and to pay for that they sell us 110 computers they export those to the united states right so looking at everything in total right so now japan can consume 130 computers right 240 they made 110 they sold to us the rest they keep there for themselves they can consume 130 computers right and they can consume those imported 700 tons of tomatoes graph that one we see a new blue dot once again outside the blue line right last last chapter you would have said that's not feasible right because that's above and to the right of our production possibility frontier but once again by importing japan is able to bust through its resource constraint by using some resources that we have here in the united states so their consumption can go up if they trade right and so let's let's uh summarize things right so this this does reinforce the notion that trade can make both countries better off right so in the united states before without trade we can consume 250 computers because that's all u.s firms made but with trade we can consume 270 computers we are better off by 20 computers our gains from trade are 20 computers tomatoes we used to be able to consume 2500 tomatoes right but now we consume 200 and 2 700 compute tomatoes we are better off by 200 tomatoes right in both cases we're better off what about japan right so before trade japan um could make made and could consume 120 20 computers without with trade they can consume 130 they are better off for computers tomatoes the same idea they could consume without trade 600 tons right now they can consume 700 tons they're better off by a hundred so both countries right are better off for each good notice something though right the united states makes out better in this deal right the united states gains from trade and each good computers and tomatoes are greater than japan's right united states is better off by 20 computers and 200 tomatoes japan is better off by 10 computers and 100 tomatoes you might say well the united states um is better off why would you pan trade if the united states better off and the answer is we don't care and the japanese don't care they don't care if we're better off they only care that they are better off and they are right so that's an important point that you may see come up in mindtap and elsewhere right you the two countries do not have to actually equal each other the gains from trade for each country do not have to be equal that one country can um be better off than the other country after trade but that's okay right as long as the second country in this case japan is better off than it was before so the comparison is not between the two countries it's are you better off with trade versus better off without trade and here in both cases each country is right so this is great right we know that we get uh each country is better off each country's consumers can consume more than they did before so where you might ask where do these gains from trade come from right and it has to do with each country figuring out what it's better at right and doing that right specializing in the good that it's better at and not specializing or and making less of really in the in the good that it's not so good at right so we're looking at what we call advantages right which country has the advantage in producing the good and which country has a disadvantage and once you figure that out you what you should do is focus on what you're good at and don't focus on what you're not good at right and this brings us to our terms that we need to talk about the concepts of absolute advantage but versus comparative advantage they are different and they produce very different results so let's look at the first one absolute advantage that means that the unit that a country can produce a good using fewer resources fewer inputs than a competitor it means you can make the stuff cheaper than your competitor right so a country has an absolute advantage if you make stuff cheaper there you can then your competitor you use fewer resources to produce the good so in our example the united states has an absolute advantage in tomatoes remember in the united states you can grow a ton of tomatoes using 10 labor hours and in japan you need 25 labor hours the united states uses fewer resources it's cheaper for them right they have an absolute advantage in tomatoes and that's how we decide the relative cost of each good that's what we're going to be looking at and that relates to our good friend opportunity cost right so we're looking here not as how many hours we need to make computers and and tomatoes we look at the opportunity cost of each good right again a different concept with absolute advantage we talk about the amount of imports required to produce the good but another measure of that cost is opportunity cost right and that's where the gains from trade come from a country can gain from trade if it specializes in the good it produces not at the lowest resources but the lowest opportunity cost right so in our example the opportunity cost of computers is the amount of comp of tomatoes that we give up right that instead go towards making computers right so again there's that trade-off more computers less tomatoes how much to make how many tomatoes do you give up to make that computer right so this is the notion uh so i what did i do here i entered i showed you how countries can gain from trade i introduced absolute advantage and i'm telling you that matters less than the opportunity cost of the good right and so that sets up our next uh concept the notion of comparative advantage which is what matters and we're going to talk about that in the next set of slides so we'll be back at you soon with that talk to you in a bit bye