Lecture on International Trade and Production Possibilities Frontier (PPF)

Key Concepts

• International Trade: Understanding how much a country should produce, trade away, and import.
• Production Possibilities Frontier (PPF): A graph showing the maximum output combinations a country can produce given its resources.
  • Factors of production include land, labor, capital, and technology.

Concepts Illustrated by PPF

1. Opportunity Cost:
   • The trade-off of giving up one good to produce another.
2. Trade-offs:
   • Highlighting the limitations in producing infinite quantities.
3. Efficiency:
   • Maximizing production with available resources.
4. Economic Growth:
   • Expansion of production capabilities.

Example: PPF with Computers and Wheat

• Constant Cost PPF:

  • Straight line representing constant opportunity cost.
  • Example: 5 wheat units can be converted into 1 computer unit.
  • Unrealistic in real-world scenarios but simplifies understanding.

• Increasing Cost PPF:

  • Represents more realistic scenarios where greater amounts of one good must be sacrificed to produce more of another.

PPF Characteristics

• Endpoints on PPF:
  • Represent exclusive production of one good.
• Efficiency:
  • Points on PPF = efficient; Points inside = inefficient.
• Economic Growth:
  • Requires increased resources, leading to an outward shift in PPF.

Example of the United States and Japan

United States

• Labor Allocation:
  • 50,000 hours of labor/month.
  • 1 computer requires 100 hours; 1 ton of wheat requires 10 hours.
  • Max production: 500 computers or 5,000 wheat.
  • Chosen point (closed economy): 2,500 wheat and 250 computers.

Japan

• Labor Allocation:
  • 30,000 hours of labor/month.
  • 1 computer requires 125 hours; 1 ton of wheat requires 25 hours.
  • Max production: 240 computers or 1,200 wheat.
  • Chosen point (closed economy): 120 computers and 600 wheat.

Implications for Trade

• Closed Economy:
  • No trade, production = consumption.
• Open Economy:
  • Potential for greater consumption than production through trade.

Conclusion

• Comparison between U.S. and Japan PPFs highlights different production capabilities.
• Main focus: Determining how much each country can trade and gain through open economies.